Why Do Indian Startups Fail?

By: Khushi Poddar

“Bangalore based fintech start up Finomena shuts its shop after it fails to raise series-A funding.”

This is the recital of just one of the 11 major startup shutdowns that happened in 2017. Despite India’s entrepreneurial strength, 90% of Indian start-ups fail within five years of its inception. Reasons, one may ask?

The start-up India campaign initiated by the Indian Government is still trying hard to get its nuts and bolts in place. The big chest worth of INR 10,000 crores stole the headlines and highlights of the previous year. According to it, SIDBI was to invest in the venture capitalists, which were to in turn invest in start-ups. Not a single rupee got disbursed. The blemish caught later on was that the bank puts in only 15% of the total corpus, while the VCs have to fetch in the remaining 85%.

By tweaking the definition of start-ups to a venture of 5-7 years, with an annual turnover not exceeding INR 25 crores in any preceding financial year, the government has linked employment generation and wealth creation plans to it. Instead of this acting as a boon, it has become a hindrance for start-ups as most entrepreneurs limit cost of resources by reducing manpower. The strict definition of Start-ups by the Indian government recognised only 502 out of 1368 applications as start-ups. An even smaller number- 111, was considered for tax benefits.

Moreover, tax benefits are really illogical because they specifically assume that the start-ups make profit in their first three years. Statistics, however, point out that only a small percentage of start-ups succeed at all, let alone make profits so early.

Also as a result of the government of India introducing policies to support FDI, several huge MNCs having large amounts of capital come and operate in India, snatching the opportunity from small Indian entrepreneurs.

All these operational issues only provide a hostile business environment, instead of an enabling one.

Let’s relate now to the well-known cash-crunch. Finance, to young start-ups comes mainly through VCs and angel investors. Many companies who have what it takes to make it work fail to get funding through VCs because the investment process is a complicated one and potential companies are vetted out thoroughly.

Another angle of discouragement is that the average VC stake is around 35%. When in the initial tender period of business, start-ups struggle to simply survive, providing such a high stake is irrational and completely out of question. Crowdfunding (providing finance to start-ups through audience engagement), is a blooming concept in the foreign countries but has not set sail yet in India.

Also, a study suggests that if a VC invests Rs. 100 in start-ups, then in a couple of years, the investor gets Rs. 700 in Israel, Rs. 500 in the U.S., but only Rs. 110 in India. Taking into account service companies and rates of inflation, there results a net loss to the investor in India. Why, then, would he want to invest in Indian start-ups.

Read More >>  http://edtimes.in/2018/02/why-do-indian-startups-fail/