Indian Startups Failing: Reasons Behind 90% Failures

According to the key findings of IBM in 2017, 90% of Indian startups failed within the first 5 years of their initiation. There are many factors that are supporting  the above mentioned finding. Some of these factors are:

• Over Estimation of Demand
• High CAC and Low LTV
• Less Availability of Funds

According to financial experts, the entire startup ecosystem of India is in a state of confusion. The Indian startup ecosystem has three main players:  

• Entrepreneurs
• Investors
• Customer

Each player in this ecosystem is responsible for the sorrow state of startups. First of all, it is increasingly becoming a trend in Indian youth that they get inspired by dilusional success stories and articles about entrepreneurship. Generally youth is unwilling to accept the fact that entrepreneurship is not an easy job and  it requires serious attention whereas most of the inspirational stories and movies are exaggerated and unreal. Another  factor behind the failure of Indian startups is the lack of innovative and practical ideas that fit into the market. Most of the startups end up creating a product that is already present in the market or product that does not fit into the market.

Over Estimation - Demand

Most of the startups overestimate the demand/market size for their product which results in unrealistic growth forecasting, reduction in Return on Assets (ROA) as unnecessary expenditures are incurred which ultimately halts the Profitability of the startup.

High Customer Acquisition Cost (CAC) and Low Life Time Value (LTV)

The capital spent by a company in the business is said to be Customer Acquisition Cost i.e. Advertising Cost, R&D, Product Development, utilities etc. LTV stands for Life Time Value. LTV is the amount of money spent by the customer on your product. Usually for a profitable startup, LTV has to be three times the CAC (3:1). But if we particularly analyse the situation of Indian online grocery startups, their LTV to CAC ratio is (1.5:1) which means that these online stores are generating less profits than the desired ones.

Less Availability of Funds and High Interest Rates

We can see that the post Covid era has not been  good for the global economy as it is experiencing a downward trend. Some economists are expressing their concerns about recessions which they believe can take place in Mid-2023 or 2024. Rise in Inflation forced the Central Banks to increase the interest rates as a result the potential investors that were once willing to invest millions of rupees in Indian startups are now hesitant to take risks. These investors are looking to secure high returns on their investments rather than investing in risky Indian startups. According to some news reports, In 2023 startup funding in India is at 9-years low. In Fact, some investor sources and founders expressed their grief that they expect the Indian startup funding environment to aggravate.

In conclusion, we know that the terms "entrepreneur or entrepreneurship" sounds good but practically entrepreneurship requires consistency and commitment. Entrepreneurs face a lot of challenges but they have to make their way through these problems by making serious and consistent efforts. Although the Indian startup ecosystem has developed significantly over a period of time but still there is a lot of room for innovation and improvement. I hope the Indian startup ecosystem will further succeed and will contribute to the Indian economy by creating employment opportunities for the Indian youth.