Sunday, December 4th, 2022 19:43:39

Startup Bloodbath : How can the start-up ecosystem succeed in India?

By Sarat C. Das
Updated: November 25, 2022 12:10 pm

In the Economic Survey 2021-22 released in early 2022, India was anointed as the third-largest startup ecosystem in the world, a podium-finish just after the US and China. The Indian non-governmental trade association and advocacy group- NASSCOM’s report said that the number of startups has been growing steadily with ten percent being added every year. With over 60,000 startups and 65 unicorns (those that reach $1 billion in valuation) in multiple industries, India seems to be a force to reckon with. Despite the fostered optimism, the startup ecosystem has formed a stark silhouette against the somber sky. It is estimated that 90 percent of Indian startups are likely to fail within the first five years, which makes it a difficult market to break into, according to a recent research study published with London School of Economics. In recent years, the Indian startups are taking a hit in valuation. Paytm Mall, which lost its unicorn status in 2022, is a good case in point. A funding crisis is looming large. To that end, India’s biggest tech investor, SoftBank’ Vision Fund has reported a record loss of $26.2 billion. In the last few months, more than 5,000 employees have been laid off from ‘promising’ startups like Vedantu, Meesho, etc. Apparently, the start-up failures are the global phenomenon, but India seems to be more at the deep end.

The pandemic has accelerated digital adoption by organisations worldwide, easing the flow of cross-border investments as investors can now quickly access information on foreign startups and their operating environments. As if in sync, overheated western markets, dominated by legacy investors such as Tiger Global, Andreessen Horowitz and Sequoia Capital, are sending startup deal valuations through the roof, according to the publication Economist.

In India, as things stand, the year 2022 has not been one of the best years in terms of startup hiring rates. Many prominent names (especially from ed-tech, as we will see below) had to lay off hundreds of people and close down certain aspects of their businesses to meet the profitability ratios and adjust to the market demands.

Funding for Indian startups last peaked in the 3rd quarter of the year 2020, which probably was the highest amount in the previous decade. Ever since then, the funding saw a constant decline, hitting its lowest in the current period – the third quarter of 2022.

In year-on-year funding amounts, this year’s third quarter has seen a whopping 80 percent decline from last year’s third quarter, according to the Economic Times.

The recent allegations of financial impropriety against the founders of BharatPe, an Indian fintechstartup, and many such Indian startups imply close-knit family ties in the corporate governance. As it is common for Indian startups to have family members in key leadership roles, such family-owned business does not build trust with the investors. Replacing them is never easy, implying that conflicts over governance issues may potentially arise in future if the Indian founding family is reluctant to cede any control even to investors with significant ownership stakes.

According to the India Economic Survey, contrary to popular belief, it is not the lack of regulation that hurts Indian businesses, but over-regulation, which results in opaque administrative processes. Under-implementation, the flip side of over-regulation, is another common regulatory malady. Startups, in general, often create markets that are beyond the scope of the existing regulatory landscape (e.g., the lack of comprehensive regulations for self-driving vehicles), and this problem is worse in India. Indian startups also have to deal with regulatory flip-flops. For instance, the recent revocation of the auto-payment feature for recurring payments by the Indian central bank caused major disruptions to payment wallets and other subscription-based startup models. What further muddies the water is that India is not one large, homogeneous market, but rather a collection of several micro-markets divided not only along the lines of state-specific regulations, but also by income levels, regional economic development, and cultural norms. These create a labyrinth of legal and other associated complexities that startups must navigate in order to thrive.

The lack of innovation can be a glaring point. In 2015-16, India applied for only 1,423 patents, while Japan led with 44,235 patents, followed by China (29,846) and South Korea (14,626). India ranked #46 in the Global Innovation Index, 2021, trailing behind Switzerland, Sweden, China, and the US. According to the IBM-sponsored study, Entrepreneurial India, as much as 77 per cent of the venture capitalists believed lack of innovation– building new technologies or unique business models- was the primary reason for the failure of startups.

With a population of 1.4 billion, including a ‘middle class’ of around 600 million, India is said to have huge market potential. But this can be deceptive, given the much smaller de-facto size of the Indian market. Take consumer technology, for example. According to a 2020 report by the Internet and Mobile Association of India, there are 622 million active internet users in India, but most of them possess only basic smartphones that lack processing speed and memory. Moreover, the absolute purchasing power of the Indian middle class is considerably lower than the middle class in developed economies. Many Indian customers also distrust online transactions, making it harder for geographically distant startups to attract these customers who often rely on traditional neighbourhood stores that accept cash payments. The Indian consumer is also highly price-sensitive, making customer retention an ongoing challenge, and leading to cash burn in the form of discounts and deals.

Some of the big ideas or start-ups with true potential have not been funded in India. The founders of eStudentBook.com VarinderBajarh and Chander Lal apparently have ticked all the boxes of meeting the eligibility of funding. ”We cover a broad spectrum ranging from availing the most innovative search engine facility to test preparation for a score of education institutions and jobs,” says Chander Lal. Despite this highly-valued company’s massive potential and innovative features than its competitors in the space of education search engine and educational guidance it is still seeking its first-round fund.

Dr.VenkateshKuppuswamy, the founder of CAFO (Council Of Accredited Forensic Odontologists), is a pioneer in forensic odontology in India with a range a technology solutions in the space of salivary DNA and bite mark analysis among other tasks, CAFO currently has mobilised over 10000 dentists in India and preparing to undertake similar exercises in many other countries.

“Our range of solutions in forensic odontology can be considered as a game changer in the application of dental evidence to both criminal and civil law,” says Dr VenkateshKuppuswamy. ‘’These technology solutions can easily identify sexual abuse, personal identification of the deceased, especially in cases of mass disaster or when facial recognition is inconclusive; or in determining ages of unidentified victims.”

Dr.VenkateshKuppuswamy has found a way to deal with his funding needs. ‘’Crowdfunding is certainly a better idea than VC funds and angel investment’’. In the initial euphoria of investing in a promising startup, the investors must not forget to keep an exit door open. Exit can be deceptive in the Indian market. Pulling off a successful IPO is no easy feat. Despite the spate of IPOs in 2021 (examples include digital payment giant Paytm, food delivery company Zomato and the cosmetic e-tailerNykaa) and the relaxation of norms by SEBI (India’s capital market regulator), the number of startups going public is still quite low when compared to the US or China. That is because the Indian capital market is still relatively underdeveloped.

India’s startups must learn to harness their potential to the public cloud that has been transformative in terms of software development. Today, it seems impossible to build software at scale with just proprietary tools. Let’s see that the Indian startups and all social actors live up to their potential.

 



By Sarat C. Das

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