- April 8, 2018
- Posted by: slava
- Category: Uncategorized
By Sanjay Enishetty, CEO of 50K Ventures
It has been said time and again that India, amongst the world fastest growing startup economy, will be the next startup capital of the future.
Several industry experts have attributed this to a young population of India. About 40 percent of India’s population is under the age 35 years. A few of the youth in India are aspiring to become entrepreneurs for making India a potential ‘Startup Nation’.
While several startups are mushrooming across India’s cities and towns, their success rate is still less than 10 percent.
Over my seven years of experience as an ecosystem enabler and a seed investor, I have interacted with hundreds of startups at an early stage. I have observed how the startup ecosystem in India has evolved over past few years. I have also been a witness to failures of startups including a few which we funded.
In the words of Elon Musk, the mastermind behind Tesla, “Failure is an option here. If things are not failing, you are not innovating enough.”
The reasons could be many for failures. But after dealing with a few hundred startups across India (including evaluation, advise and mentoring), I felt that there are 5 top reasons why most startups fail in their earliest stages, which we also call it as a “valley of death”.
Startups do not always fail because of inability to raise funds. Some of the other reasons have to do with structure and growth vision.
Following are five reasons I believe cause a startup with a potential, to fail:
- Conflict between cofounders and lack of a common vision
While all founders need not necessarily agree on everything, it is important that they are on the same page.
A few years ago, I met two enthusiastic entrepreneurs who graduated from premium institutes. They had built an excellent product for the real estate industry.
The company had taken off with set goals, vision, a great effort, and enthusiasm. But the founders could not sustain the momentum.
Soon, differences between founders started weighing on the growth of the startup.
They were struggling to raise funds.
The fighter kept convincing his worrisome partner to pursue various fundraising options.
Along with a blueprint of their startup and clients’ stories, they knocked on several doors.
Investors were keen to invest in their startup but the differing views of the founders kept them at bay.
The worrisome founder finally gave in and got sidetracked by family responsibilities.
He soon expressed his desire to exit the startup.
By himself, the fighter felt lost and found it difficult to get another capable partner.
Finally, the duo shut shop and went on to take on jobs in the corporate world.
I have seen similar issues in my journey as an investor.
I had come across another such startup which had hit the floor running. It had received a committed funding and had a few clients.
However, as the company got successful, critical decisions, as to where next to go or what next innovation to bring in, were getting delayed.
The founders were divided and each believed his way to be the optimum one.
Before they realized their folly, it was too late. The startup began to crumble.
A similarity between challenges of both the (above mentioned) startups was a lack of a common vision and an inability to sustain tough times.
They had no clear division of roles or a roadmap towards their goal.
It is imminent for founders to divide their responsibilities to reduce any clash of views.
It is also important for them to have a vision of where they would want to be in 10 years or so for a success story.
2. Not on-boarding the right resources
You have a vision, you have an idea for the perfect product or a service and now you have the funding, but what you are struggling with is getting the right team members.
It’s a very big challenge for any growing startup today to find and hire new talent to help tackle the company’s growing needs.
Often, entrepreneurs tend to take on more than the manageable responsibilities on themselves in order to save on hiring budget.
This is a big mistake.
It is very important to not cut corners and hire small.
With the high amount of attrition that startups see, it is best to invest in creating the right team size to get the work going.
There will always be other places to economise but overloading responsibilities on a small group would only lead to pressure and a negative environment in the workspace.
In some cases, the issues are different. The firm is looking to hire but is not able to find the right talent that would seamlessly fit into their organization and the required role.
The startup then hits a roadblock due to this reason.
I have always noticed that some young founders find it unnecessary or expensive to hire an experienced executive and chose to stick to freshers or those with only a few years of experience.
A team must comprise of all kinds of people. It is important to have a seasoned player on your team to win the match who will be able to step in where a young mind won’t be able to.
I came across this startup from Bengaluru which works on e-commerce solutions.
Both the founders came from a tech background and built a very robust product which received good validation from the market.
But the mistake was that they themselves started selling the product.
They pitched the product but unable to explain the growth prospects of the business, which was actually the role of a sales expertise.
These founders did not feel the importance to hire a sales resource. They thought they could do it themselves and had to face the brunt of it.
Later, the founders refused to accept their erroneous hiring strategy and later blamed their failure on the competition.
They claimed their competitors killed them by burning more money to acquire the customers. They failed to hire the right resources to fill the gap.
3. Failing to find a product-market fit
Entrepreneurs set up a startup as a solution to a problem. But sometimes the market is not ready for the product or else the entrepreneurs do not have enough understanding as to which industry to market their product or service in.
Narayana Murthy had once said, “You must be able to convince your customers about the benefits that association with you or your products will give them. People are ready to pay if they are convinced about your services or products.”
An article in the Fortune magazine once cited product-market misfit as one of the top reasons for a failure of the startup.
I had a met two founders a few years ago who wanted to bring digitization in the education sector.
Their plan was to introduce tablets in schools. But they were way ahead of time. The market was not ready for such an innovation.
Had they come in with the idea two years later, it would have been a huge success.
The other problem the startup faced was they had overestimated the market and assumed there will be a disruption of their product.
But they had failed to understand that none of the schools are interested in adopting such personalized technology which may be a threat to jobs of their teachers.
Moreover, parents were not keen on spending on such “fancy” devices even though they were trying to solve the problem of self-learning.
Often there are startups that come up with out-of-the-box solutions but are not able to pitch the idea clearly or to the right target audience.
The group pivoted and moved into a different space and put their initial idea on the backbench.
It is essential that entrepreneurs understand and study the market to gauge and zero down on a specific niche and a target audience.
An entrepreneur spends a large amount of his or her time, efforts and money on creating a product and introducing it in the market.
Several startups fail to understand the difference between an innovative product and a marketable product.
While out-of-the-box thinking might get you an innovative product, it is also important to understand if there is a market ready for such products.
4. Not raising funding at the right time
Majority of the entrepreneurs who come from a less work experience background try to bootstrap their startups with their savings or with the loans or “investments” given to them by their family and close friends.
It is going from this first stage of funding to the next step, where an outside investor is willing to invest in the company through equity, is where the issues start.
Finding an investor who is willing to stick with you for a period of time is like finding your fairy godmother.
With the number of startups rising and investors tightening their grip on their money, it is an uphill climb to get funding.
Jeff Bezos founded Amazon with his savings and his parents too had invested a sizeable portion of their life savings into the company.
It took Bezos two years to finally rope in outside investors.
At the time, Amazon had already started its e-commerce platform.
Startups today have become impatient. Investors are constantly looking for proof of growth and use cases. Our firm 50K Ventures gets nearly 50-100 applications per month from startups looking for investments but a good portion of them are still at a whiteboard stage.
Looking for funding early on is a good start as the feedback from knowledgeable investors would only help the founder strengthen the organization and solve glitches.
But, expecting to get funding and then getting disheartened right at the beginning (with rejections) is not the right way to go.
An entrepreneur needs to first bootstrap his or her startup and develop a client base before knocking on investors’ doors.
An investor would be keen to give you the time if you have your game plan ready and have already garnered some client base.
Most of the startups I interact with want to move ahead with the business only once they get funding. Moreover, they blame the investors’ disinterest as a reason for failure.
Another startup I know from the Northern part of India had raised a very small seed fund thinking they will attract ‘series A’ funding by the end of the year without any understanding of the metrics needed to talk to a venture capitalist for Series A.
They exhausted the seed fund within no time as they were dealing with B2C segment, where the customer acquisition cost was very high. They had no alternative strategy to sustain apart from raising another round of funding. Rest is history.
They had to give an exit by shutting the company – the only reason being funding issues.
It’s important to understand and know what stage investors would be interested to look at one startup to fund.
The startup should make sure that they reach a milestone which can attract the funding.
5. Not able to monetise, become profitable or innovate to beat competition
I have seen several startups who have it all worked out but are still unable to either monetize or reach a profit mode.
Some find it difficult to break-even at an operational level even after 5-10 years of having a strong flow of clients and a good marketing strategy.
This is primarily because they are unable to charge right or leverage their capabilities to get the customers to pay the right amount for their products or services.
Sometimes, the problem could also be fast growth.
The company did well, they got the funding, their products sold as fast as hotcakes but then they got stuck.
What next and how to grow from here was the issue.
Profitability takes a hit and the company becomes stagnated.
I had once read that often startups confuse achievements for success.
I understood it when I met a group of energetic and intelligent group of people who were running a company that had started meeting milestones.
But they mistook it for success and were not able to grow the company further.
Another issue was that competitors started eating into their market share.
Their investors, who look for profitability and growth, started becoming restless and these entrepreneurs found it difficult to meet those expectations.
The moral of this story is that a startup needs to constantly re-innovate.
They need to be on their toes to figure what next in order to be ahead of the competition.
While failure can be heart-breaking, I believe several of these entrepreneurs could have salvaged their startups if only they had taken lessons from failure.
Also, there is a lot of luck involved. World’s richest man and founder of Microsoft – Bill Gates once said, “It is fine to celebrate success, but it is more important to heed lessons of failure.”