why do most indian startups fail

(Mid year 2015)

I am writing an article after a long time. This time the topic is with regards to Indian startups. The reason that I am particularly writing about startups is because a very large number of students are opening their startups or are joining existing startups after graduation. The number of startups is growing at an exponential rate, and I believe that this will be a continuing trend. I want to give my take on this new socio-cultural trend.

Let us first define a startup, and discuss why it is important to talk and write about it. A startup is typically construed to be a new venture in a hi-tech area. Again this might be a very restricted definition and clearly does not encompass new ventures in very traditional areas. However, let me stick to this definition in this article. Typically most startups are founded by students right after college or young professionals. The sad part of startups in India is that most founders typically sacrifice their career, earnings, personal life, and professional aspirations to create something that in an overwhelming majority of cases fails (for the statistics, read the last paragraph). My aim in this article is to highlight some of my thoughts on why I think most Indian startups fail, and look at possible solutions to this problem. Note that these are my personal views, and do not reflect the views of my employer, IIT Delhi. Additionally, whatever I am writing is from my personal experience that I have gathered from many of my friends, friend's friends, ex-students, and newspaper reports. Nevertheless, I feel that in the broader interest of society, I should summarize what I have learnt from people who have founded startups.

The first building block of a startup is the idea. Note that in this sense a startup is different from a traditional business. If I setup a shop that sells chocolates outside a school, I am guaranteed to make some money. I might not make enough money, or I might be chased away by the civic authorities, nevertheless, I can still find a way to stay above the poverty line. However, the idea of a startup is very different. It is a new business model, or a new product that needs to be sold to an upwardly mobile middle class. They might not like the idea, might not be enthusiastic about it, or there might be many other competitors with better offerings. Since most startups are internet based, the chances of competition are very very high because the internet nullifies geographical distances.

Clearly the idea has to be new, fresh, innovative, technically sound, free of legal issues, socially acceptable, and needs to have the potential to make a lot of money. There are many adjectives in the previous sentence, and we are assuming that the group of founders will have technical geeks, legal experts, business honchos, and sociologists. This is hardly the case. Most founders of startups in India are typically young professionals. Note that these people typically have good pedigrees, are confident, articulate, and have an appetite for taking risks. However, this is not sufficient.

Let us wind the clock 10 years backward. Most students in India start losing touch of real life once they are 15-16 years old. The pressure of getting into a premier institution (IIT/NIT) is overwhelming. Students from small towns typically move to coaching hubs such as Kota in droves and spend the next 2-3 years preparing for different entrance exams. They have hardly any time for anything other than studies. Once they get admitted to a premier institution, the situation does not change significantly. Most of the time, the first year is typically the most strenuous in terms of studies primarily because students are new to the system, and a lot of them want to change their branch of study.

The subsequent years are no better in terms of developing a world view. Since most students stay in hostels and have limited access to television, they are mostly unaware of events of national and international importance. Since reading newspapers or anything for that matter seems to be out of fashion these days, students are bereft of the benefit of traditional channels of information that are otherwise available. Secondly, most campuses of premier universities are like ``virtual worlds'' -- fairly cut-off from the rest of the society. As a result, students do not develop a world view and do not develop an understanding of society. The situation does not grossly change in the first few years after joining a job. A typical job in a multi-national company in India involves very long hours and leaves little time for professionals to interact with the society at large. The weekends are often spent sleeping, partying or traveling. As a result most of the people that I have talked to in this bracket have a little understanding of the needs and requirements of a typical middle class family. They are mostly aware of the requirements of their friends but not of somebody who has young children and aged parents to take care of. Note that India has a very large middle class with a fair amount of spending power. Unless we understand their needs and aspirations, our products might not be what they are looking for. This dissonance in perceptions and actual requirements is a big reason for startups not getting enough customers.

Let me consider some examples by suggesting some ideas.
  1. Use the phone as a remote control to open a car.
  2. Use the phone as a remote control to turn ACs on, turn the geyser off, or change channels on a TV.
  3. An online portal to connect music lovers.
  4. An online portal to sell groceries.
  5. A service to connect senior citizens with similar interests.
  6. Home delivery service for diapers, tissues, and other baby products.
These are some random ideas, and I could come out with more. The only thing that I can guarantee you is that these will not work! Let us see what is the problem with the first 2 ideas. Most people do not have a problem with having an extra remote (for TV or AC) around. Secondly, most smart phones have very low battery lives, and there is no reason to not be able to run the TV when the phone is discharged. What happens if the owner of a phone with this app goes out for a walk? For idea #3, there are hardly enough music lovers in an area to justify a startup. For idea #4, most middle class families will want to touch and feel a vegetable before buying it. They will not trust an online delivery guy. Idea #5 will bomb for sure because senior citizens are not very tech. savvy, and idea #6 will not work because already pharmacy stores do home delivery for large orders.

As you see, all of these ideas might look okay, but are simply impractical because the society will not accept them for a variety of reasons. There can be many legal issues also. While making a matrimonial site, one needs to be very careful about revealing identities, and ensuring that no obscene content is exchanged. Otherwise, the legal consequence can be very severe. As you see, it is very hard to figure out so many things unless a person has the experience of actually living in a society and interacting with people across all age groups and social strata. Most founders of startups do not have this experience, nor do they try to conduct in-depth surveys to gauge customer perception; as a result the outcomes are not very favorable.

Lastly, I would also like to add that we have an enough number of startups that focus on online retailing, analytics, and social media. Why not have high technology startups that focus on the defense, aerospace, and high end manufacturing industries? Any startup that is based on technology rather than on an apparently ``good'' marketing idea has a far higher chance of success. Let us take a look at the math. If a social media startup earns 10 paisa per click (high in my opinion) it will take 10 million clicks to earn  10 lakh (1 million) rupees per year. This is a very high number, and we clearly need to operate at a very large scale. In comparison, a well made piece of technical software or service can fetch upwards of 1 crore (10 million) rupees in a single deal. However, to produce such software it is necessary to be highly trained (at least a Ph.D), have loads of R&D experience, and have very good contacts in the industry. We have a massive dearth of such people and this leads to extremely low tech. startups.

Let us now come to the next important ingredient -- money. Money is an important ingredient for almost everything including a startup. Here again, Indian startups are very different from their western counterparts. This morning I was watching a documentary on TV. They showed statistics, which showed that an overwhelming number of western startups begin with funding from friends and family, whereas Indian startups get money from angel investors. Angel investors are venture capital companies that provide funding to early stage startups. There is a reason for this trend. In the west, there is a lot of competition among entrepreneurs to get their hands on venture capital money. As a result, venture capitalists are extremely cautious in disbursing funds. Consequently, most startups start in a garage with borrowed money, which often has to be returned irrespective of the final outcome.

However, the situation in India is very different. Especially for students from premier institutes, a lot of funding is available. There are many kinds of angel investors in the market. There are some who genuinely believe in the ``India Story'', there are some who believe in the creative potential of our youngsters, and then there are some who want to use the VC route to bring in money parked in tax havens such as Mauritius and Singapore. Irrespective of the source of funds, angel investors are out there, and are willing to provide a lot of money. This is not necessarily a good trend. Taking money from friends and family puts a lot of pressure on young entrepreneurs to actually deliver, and return the money. In this case, relationships are at stake. However, taking money from a third party, which is pretty much coming with no strings attached, does not put any real pressure on entrepreneurs to deliver. Founders often leave startups midway, go abroad for higher studies, or simply get bored.

To make Indian startups actually work, it is necessary to add more constraints to the money supply. An unbridled supply of money is not exactly the best way to go forward. Founders should know that the purpose of a business is to earn profit, and provide value to customers. Hoping that one day somebody will buy the startup for millions of dollars is not all that reasonable. It is true that some startups get sold for massive sums, and even some Indian startups are on that list. However, this is not the norm, and nobody should explicitly strive to be the exception. Additionally, startups from India have low visibility, and getting sold to Silicon Valley biggies is not as easy as American startups.

I would like to make another important point here. A lot of founders of businesses do not approach formal banking channels, and do not take advantage of government schemes. In this year's budget (2015-16) a thousand crores (200 million dollars) have been allocated to funding startups. It is true that to get government funding the proposal has to be above a certain bar because most of such proposals are reviewed by a team of experts often consisting of academics. This is a good thing, not a bad thing. Writing a good, well studied, and technically consistent business plan is not just desirable, it is also essential. If a group of founders think that they have a document that clearly elucidates their business idea, value to the society and the nation, then they should approach the government, and ask for help and guidance. Most students feel that the government is out of reach, and you need connections. Trust me, in this day and age, the government is far more honest and approachable, and ordinary citizens should at least make an effort to leverage government schemes to the fullest possible extent.

We have talked about the idea, and money. What next? Well, it is talent, which is by far the most important factor once the founders have a decent idea, and have the financial resources. Who is going to do the work? Here, again Indian startups are very different. Let us look at Bill Gates, Steve Jobs, and Larry Ellison. These three distinguished gentlemen are the founders of Microsoft, Apple, and Oracle respectively. The commonality between all three of them is that they are all technical people, and spent a good part of their early life writing computer code, making circuits, testing and debugging their designs. The same is true for others such as Mark Zuckerberg, Sergey Brin, and Larry Page.

However, this is not the typical profile of an Indian startup boss. Most of the time, the founders of Indian startups are business school graduates who might have worked in top finance/consulting companies, or are technical people without any interest in technical work. They are the ones that carry fancy titles such as a CEO, CTO, or COO, and there are others who often do the technical work. A lot of such CEO types that I have met were often very ignorant of the technical work happening in their organizations. This particular trend leads to a disconnect between the employer and the employee. The employee is typically not from an extremely privileged background yet spends 60-70 hour weeks tirelessly writing computer code. The employer is the one who often looks at the sales/marketing aspects and often places unreasonable demands on the employee. There is no formula for kinship even in startups that have less than 10 or 20 members.

The important take home point here is as follows. In a 5 or 10 member startup we cannot afford a dedicated CEO or CTO. This places an unnecessary financial burden, and creates a disconnect between team members. Moreover, often CEOs and CTOs who are not technically inclined promise the world to the customer. They later on discover to their chagrin that their promises failed to hold water because they were extremely unrealistic.

Let us now come to the employees. In today's market finding a good computer programmer is very hard. This might sound ironical given the number of top colleges that India has; however, this is true. Most of the students in top institutes are hired by very well paying multinational firms. It is very hard for a fledgling startup to match an MNC salary. As a result startups often have to go to other non-premier colleges to scout for talent. There is a big divide in India between different classes of institutes, and startups would often find otherwise sincere students that lack sufficient practical skills. It is not wise to invest a lot of money in training employees for an early stage startup. They need employees who are all set to begin coding, and thus being productive. This is seldom the case. It is even harder to find mid-level professionals who can lead teams. Their salaries are either obnoxiously high, or they have shifted to people management in their companies. In both cases, such people are not suitable for startups in their early stage.

Also note that in the Indian educational system, the emphasis on practical skills is somewhat low. This might be not very relevant in premier institutes where students have other avenues for exploring their creativity, but for the rest of the educational institutes this is a very important issue. It is paramount that we produce students who companies can hire immediately after graduation. Spending lakhs of rupees on training students to write even the simplest of programs or create the simplest of designs is not the job of companies. Only big companies like Infosys can afford it. Small startups cannot afford this luxury, nor should they be in the business of training. The responsibility of training engineers lies fair and square with schools and colleges.

We are not just talking about technical skills here. A lot of the graduates in this country are severely deficient in liberal arts skills. Ideally speaking, we want an engineering student to write flawless English (or a vernacular language, if the need arises), be articulate, and be able to present to a technically literate audience. We will find very few graduated students with these qualities if we start looking. A lot of students pick up these traits later in life; however, a broad majority of them do not. This has resulted in a very low level of language proficiency in adults. Unless the Indian educational system starts putting a greater emphasis on humanities skills and focuses on all round personality development, we will never find people who can run modern internationally competitive businesses.

Let us now look at a different class of people who are very competent, and want to join a startup.  Such people might want to do something really innovative, or they might want to see what it feels like working for a small company. Some of my friends joined startups because they wanted to work in a company that sells products tagged with the line, ``Made in India.'' However, such examples are very rare. Let us see why. In the US, and other western nations, a company is a company. If anybody is employed then they are employed with a contract, which is legally enforceable. There are strict rules regarding payment, conduct, rights and responsibilities. The owners can go to jail if they violate terms of the contract.

In India, on paper we have a lot of laws, which are not bad at all. Some people argue that for companies with less than 20 employees, the laws are fairly lax. Well, I am not a legal expert, and thus I am not the most competent person to comment on such issues. However, the laws that I have seen on the face of it are not all that bad. The issue lies with the implementation. There is a wide spread belief among people that if they join a small company, hardly any rules and policies are followed. I do not want to lend credence to these rumors. However, I have heard a good number of anecdotal reports from friends and ex-colleagues who are complaining about irregular payments, obnoxiously long work hours, and improper standards for hiring-and-firing. Not all of these reports are false. My basic question is how many founders of startups have actually been penalized for not following proper procedures in running their companies? How active has our society been in pointing out such offenders, and how active have the authorities (including NGOs) been in ensuring that proper employment practices are followed? The answers are not very encouraging, and this particular public perception leads many technically competent people to avoid working in startup ventures. I would appeal to the government to ensure that irrespective of the size of the organization, all employment laws and procedures should be followed to the last letter. The message should be loud and clear: Laws are for everybody, no exceptions.

Let me now summarize this article. I have talked about ideas, funding, and talent. I feel that we fall short on all of these counts, and thus our hi-tech ventures do not work. What is the evidence that I have? Please visit iSpirt's website, which is the umbrella body of Indian IT/ITES product companies. Here is what it says. Let us assume that a VC (investor) firm puts in 100 Rs. into startups. Let us see what happens after a couple of years. In Israel, the investor will get 700 Rs, in the US he will 500 Rs, and in India he will get 110 Rs. The website says that even the figure of 110 Rs is wrongly calculated because it includes service companies as well. Additionally, if we adjust the numbers for inflation, there is a net loss. From these statistics, we can clearly see my reason for writing this blog. There is a big difference in the success rate between an Israeli or American startup and an Indian startup.