The Dying Startup Ecosystem in India
India’s startup ecosystem boomed for years. Now it is slowing down, and the startup frenzy has slowed to a crawl.
Fewer new entrepreneurs are emerging in India, for several reasons.
Risk Aversion
Investors are reluctant to back high-risk startups. Yet investing is a gamble: the higher the risk, the greater the chance of big profits. Innovative ideas usually need the courage to take risks.
FedEx and Facebook were promising startup ideas, but investors turned them down many times. They seemed too risky or unlikely to succeed. Today, both are among the best performers in the global market.
Indian investors still follow a very rigid approach. They see ‘Copy and Paste’ models as a safer bet than novel ideas.
These copied business models usually struggle to pick up pace. Replicating a foreign model in India is hard because people here have different needs and mindsets.
Industry statistics say 40% of startups fail because of a lack of ‘product-market fit’. In other words, we build products that do not meet people’s needs here, so they do not sell.
Rapido and Ather Energy show the value of backing ideas built for local needs. Both have made a big difference to the startup ecosystem in India. Rapido pioneered the ‘Bike Taxi’ in India, and Ather Energy was the first in the country to launch EV scooters.
Skill Shortage
A shortage of skilled people is another reason the startup ecosystem in India is shrinking. A startup needs a group of skilled professionals with enough knowledge to see the product through.
There is a huge gap between rote learning and industry learning. The country’s age-old education system produces professionals who lack the analytical and practical training that startups and companies need.
Statistics show that less than 5% of Indian software engineers can write functionally and logically correct code. Yet entire cities in India are hubs for IT startups.
This talent gap means startups will find it close to impossible to hire the right people, especially in non-metro cities. To fuel the startup ecosystem, India must revamp its education system and make people more industry-ready.
Economic Slowdown
The most glaring problem is the overall slowdown of India’s economy. The number of startups in 2019 fell to 5462, a 35% drop from 2018.
The decline is no surprise. The government could not keep its promise of Rs 10,000 crore in fund support under StartUp India, along with incentives of Rs 1,000 crore.
Investors have lost confidence in India. We need more successful government schemes to boost both foreign and domestic investment.
Startup funding is bound to suffer when the economy is sluggish. Investors will be very cautious before financing a venture. How much entrepreneurs can raise will depend on factors such as the nature of their business and their competitors.
Lack of proper business incubators
India needs more business incubators built by successful entrepreneurs, who understand the pain points of new business owners.
A big advantage of incubators is that they fund an idea purely on its merit. They do a lot of market research before deciding to back an idea. Incubators also give entrepreneurs another source of seed capital.
The situation may improve when Indian angel investors and successful startup founders pump capital into young startups. These investors will help smaller startups earn better returns and help the slowing economy recover.
Entrepreneurs also need to get smarter. They should solve the problems people face instead of trying to copy a success story.
For more on the finances of startups in India, visit The Company Check.
