Building a startup - Learnings from failures to get it right

In today’s world of interconnectivity and information abundance, it is incredibly easy to start a company. Since Prime Minister Narendra Modi’s launch of the startup India initiative, more than 50,000 startups have been recognised by the Government of India as of June 2021.

If you have the bright idea, getting funding for it too has become easier than ever before. For instance, venture capital investment in Indian startups touched $11.1 Bn in 2020 and an astonishingly high $12.1 Bn in the first half of 2021 itself!

However, there is a dark side too! A study revealed that 90% Indian startups fail within the first 5 years of their life even after receiving funding. This indicates that a startup needs something more than just funding to succeed.

If an entrepreneur thinks that launching a startup was tough, then s/he is in for an even bigger surprise, because sustaining it is an even tougher job! For instance, out of all the startups that begin life, only 10% actually succeed eventually. Let’s look at a few examples of those start-ups who started life with a bang, but died an early death for a variety of reasons. .

Cardback was a Fintech platform launched in 2012, that engaged people with multiple credit and debit cards, comparing the best rewards and offers for each transaction. Funded by high-profile angel investors, it had raised $170,000 within five years, a huge sum back then. However, the credit and debit card market in India wasn’t mature enough to be tapped into, and Cardback folded in 2017.

Taskbob was a home services company that started in 2014 and offered on-demand electricians, plumbers, carpenters, and others. In 2 years, it served over 1.5 lakh orders but had to shut shop due to lack of funding.

Founded in 2015, the subscription-based Doodhwala delivered fresh milk and other daily essentials to the doorstep. It went through multiple rounds of funding, raising as much as $4 Mn. However, it shut down in 2019, thanks to intense competition from the likes of Big Basket and Grofers.

There are thousands of examples such as these. So the main question is: Why do these startups fail to sustain themselves?

Let’s examine the top 4 most common reasons.

1. Lack of funding

This remains the biggest reason why startups run out of steam. They may have received large rounds of funding, but due to various reasons, investors who were bullish earlier, often back out when the going gets tough. It can be due to differences in vision with the founders, or lack of confidence in the market’s response, lack of alignment of vision and many other reasons. When the lack of funds hits hard, very few startups manage to sustain themselves, bootstrapping your way to quick growth is a hard task to achieve.

2. Unsustainable business model

Often, a new product/service creates an initial buzz, especially if it has a sound marketing strategy, an attractive website, or a generous budget. However, this initial success doesn’t translate into growth unless the underlying business model is sound. This means the various aspects of the business, like supply chain, revenue streams, manufacturing processes, and more importantly knowing the pulse of the customer need to be watertight besides having a robust customer acquisition and retention model. It is critical that startup founders know and focus on these aspects well to make their business scalable.

Companies like PepperTap and Local Banya are perfect examples. Local Banya tasted early success, but its business model was unsustainable—it relied heavily on local vendors, had poor inventory management and unsatisfactory grievance redressal systems, which led to its premature closure.

3. Drowned by the competition

Stiff competition from other industry players is another reason that many startups are unable to sustain themselves. They crumble under the pressure, which can happen if they are unable to retain the agility they started with. When this occurs, in most cases, startups desperately pour funds into the business to keep up with the competitors until the cash dries up.

Grocery delivery startup GrocShop and hotel aggregator Stayzilla are great examples of promising startups that were eventually crushed by stiff competition. Stayzilla couldn’t match the deep pockets of Oyo and MakeMyTrip, while GrocShop, which was already a late entrant into the market, was unable to absorb the prohibitive costs of logistics and customer acquisition.

4. Unfavourable regulations

It might seem unlikely, but sometimes, changing government regulations can spell doom for a startup. The entire business model of a startup may depend on something, which gets adversely impacted by the changed regulations.

Take the Cryptocurrency market. Koinex was India’s first Cryptocurrency exchange which, in less than two years, acquired over 1 Mn users and had a trading volume of $3 Bn! On one hand, while the market was not fully ready for this concept, on the other hand, the government and RBI cracked down on the crypto market and issued a ban on Cryptocurrency transactions, making it impossible for Koinex to continue.

Apart from these, several other reasons can lead to a startup’s failure, like over-diversifying the product/service too soon, diluting an initial niche product into a mass-market offering, lack of focus and coordination among the founders and leadership, etc.

Now that we have seen the various challenges that lead to the collapse of startups, the obvious next question is: What should startups do to sustain?

1. Find a VC partner who brings in more than just funding

For founders, a venture capitalist is much more than just a source of funds. Since the VC deals with companies across sectors, they have a lot of expertise and insights that a startup ordinarily wouldn’t have. Taking advantage of a VC who brings new ideas to the table can be a great revitaliser for any fledgling startup.

2. Add product/service offerings based on market trends

To sustain startups, one has to closely follow market trends and evolving customer needs. Based on this information, one must arrive at making changes in the existing portfolio. However, it all starts from knowing the customer better. For instance, Paytm started as a prepaid mobile and DTH recharge platform, but based on gathered customer insights, it slowly included recharge/payment of other services, digital wallet, online ticketing, online shopping, payments bank, etc. Today it has transformed itself into a SuperApp!

3. Get a good team in place

To help startups sustain their initial success in the medium-to-long term, only the founders are not enough. They might have great ideas, but they don’t necessarily have the various areas of expertise needed to implement those ideas effectively. Hence, getting a robust team in place is critical, since the various subject matter expertise like marketing, financing, logistics, business development, customer service, etc., can be distributed to achieve better results.

4. Don’t forget to innovate!

It is an unfortunate truth that even though innovation leads a startup to its first successes, the same venture often tends to lose that innovative streak, thanks to the stress of day-to-day business. A startup has to remain innovative and agile and think on its feet not just to sustain the impetus of the business but also to chase future growth.

Can you think of any other reasons that can lead to a shutdown of entrepreneurial aspirations? How would you advise young hustlers to survive and grow?