Why India needs a better Start-up ecosystem; Despite India Being the Third Largest, Why do Indian Start-ups not turn Profitable?

A wave of euphoria spreads every time a start-up in India joins the prestigious Unicorn Club or the list of many ‘soonicorns’ (soon-to-be unicorns) waiting to enter the coveted lineup of Unicorns.

However, there is a much deeper and larger story at play when it comes to the Indian start-up ecosystem. By that, we are not talking about the number of start-ups in the country and those who can get regular funding, but we are touching base upon the numbers that dwindle or obliterate in 2- 5 years. 

Or even those start-ups that receive regular funding but have little to show in terms of profitability of the company, it is like pushing on the accelerator in hopes that one would make it to the finish line while secretly knowing that the gas tank is empty or almost!

India, in recent years, has been topping the charts regarding the number of start-ups it has been churning each year; this lead has taken it to the number three spot as the third largest start-up ecosystem in the world.

The figures are impressive and by no means take away from the glory that the start up’s have received in these years. 

India has a total of 107 Unicorns, i.e., start-ups with a valuation of $1 billion or more. With 107 Unicorns, the aggregate valuation is a startling $340.79 billion – these figures are as of September 2022.

In fact, the year 2021 set a record with 44 entries to the prestigious unicorn club. However, when we look at the track record of how many of these start-ups have actually booked profits, that is another story. This is where the question of how well the start-up ecosystem is actually doing in the country arises. 

What Is the Real Story?

As per records, the reality is that at least 80 – 90% of these start-ups fail within the first five years, and those who survive since they are lucky to attract funding based on their growth potential have not booked profits and, by and large, have become cash guzzlers.

One of the main reasons a storyboard idea of/for a company is rejected in one of the most popular TV Shows – Shark Tank, is that there is no novelty/USP/ in business models.

1. Hence we will call this a – Lack Of Novelty/USP/Innovation. 

According to a survey, almost 77% of Venture capitalists think there is no novelty/innovation in the business models of most Indian start-ups. This is an amazingly large number for every business to make it in the market, and both for its growth and long-term success, it needs to innovate. 

The start-up needs to have a USP to begin with, which is its unique selling point, and later as it gains traction in the market because of these factors, it needs to start to innovate. Lack of innovation will not only make the business model obsolete, but it will also lose out on competition as newer companies get ready to take their place.

Hence most start-ups in India come with a “BANG,” which creates a market buzz for some time and may attract some funding, but soon it finds itself out in the cold. But fear not, for the founders have made their money in the venture and moved on to something “NEW” only to repeat the story.

2. India’s Model Family-Owned Businesses Boost but no Start-ups to Boast.

Ironically, a country that has made its name in the start-up ecosystem has no start-ups that have actually grown to the likes of family-owned brand names. Not one!

Also, Indian Start-ups are known to copy/replicate global start-ups then; where is the originality?

But again, not all is grey – there are shades of green too, for some start-ups have a unique selling point, such as ChaiPoint, or even Swiggy.

3. Where is the Growth Potential?

An idea for a start-up may be unique, but another factor that needs to be considered is whether the concept has scalability/ growth potential; if not, the start-up cannot survive for long just because it is a unique idea. It needs a market and the potential customers that it needs and wants to target, the potential customers cannot remain just at the same number, but they have to grow. Hence, a company’s growth potential plays a prominent role in whether it can survive the two – five-year time frame; otherwise, it will just recede in the corner to be forgotten.

4. Funding

While funding has not been an issue for some “lucky” ones’ they are those who may not be as lucky, and hence no funding to pump into the business will only shut it down. Why is funding critical? It is important and can be attracted only when the business model is profitable. Why would a venture capital firm invest in your company if not?

5. What and where is the focus?

The current trend in the Indian Markets for start-ups is to go for an IPO. Almost all start-ups, after a few years of lacklustre performances and no actual profitability to show in the books of accounts, want to issue their IPOs. 

Almost all businesses that have seen the heights of success have done so because they had clarity – what is the market they are looking to target? What will be their area of expertise?

Are they going to club together a bunch of products and services, or is there a core product or service they will cater to? 

Hence, the focus is a must for any business to flourish.

6. Product VS the Market

Many businesses fail because there is no market for their product or service. A company can do well only when it provides value to its customers. Many simply launch products to fill the gap or try to expand their market by making products with no value. At the end of the day, a consumer/customer will only buy your product or service if it provides some value to the customer. 

And this is where excellent marketing gimmicks and enticing advertisements play their role – To attract the customer to buy the product but ultimately, since it provides no great value, the customer ends up feeling cheated and will never make the same mistake again or trust your brand. 

7. Leadership Issues

Now a start-up is someone’s vision, an idea – the founders and driven by the core team members. However, it is not essential that a founder is a good leader or knows how to run a business successfully or even lead a team. This is where the gaps start to form. A founder may try to play all the roles either because it allows him the ego boost or for other reasons. However, this functioning does not give the right direction for a start-up to scale successfully.

8. Lack of Adaptability

The market dynamics are ever-changing, and the complexities of customers in terms of their needs are also ever-changing. Therefore, for start-ups to flourish, they need to be able to gauge in which direction the wind blows. Adaptability and being able to find solutions to teething and other issues are vital. 

9. Business Model 

Most start-ups fail to realize that just a good website and an impressive marketing budget would be enough to attract customers. But the more significant issue is not only being able to attract customers, but customer acquisition and customer retention need a well-thought-out strategy. And only a foolproof business model can do that.

10. Ignoring Customers 

In the beginning, the founders may be trying to find funding, the right talent, the company’s management, and so much more, but they forget about the customers. 

Start-ups need to be customer-centric, for the customer is ultimately the king! If they remain focused on the customer, then decision-making becomes much easier, the focus remains clear, and hence good reviews and feedback from the customers come pouring in. This is the biggest plus any business can have.

11. Malpractices and Monoply

Many Start-ups in order to survive have started to indulge in unfair trade practices just to enjoy a monopoly in the market. This attitude on the part of some companies has also recently come under the scanner of CCI, the unfair & malpractice authority check in India. and so in keeping with the same heavy fines have also been imposed on these companies. 

However, this only spoils the brand value of such companies and in order to gain market share indulge in malpractices that end up affecting other companies that are trying equally hard to gain market traction.