The Indian startup ecosystem is like the caste system

Look far and wide.
Look far and wide.
Image: Reuters/Arko Datta
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Long before Flipkart and Snapdeal became synonymous with Indian startups and e-commerce, K Vaitheeswaran had co-founded India’s first online e-commerce venture Indiaplaza in 1999. Despite the first-mover advantage, Indiaplaza failed and shut shop in 2013. Now, at a time when the sector is maturing, with firms and their investors looking for profitability, Vaitheeswaran, through his book Failing to Succeed, shares his experiences of starting up. He details his journey and looks at what went wrong—simply put, the company ran out of funding and was forced to shut down.  Following is an excerpt from the book. 

The Indian startup ecosystem is like the caste system.

The typical profile of an Indian technology entrepreneur is of a young person from a premier technology or management institute in India or abroad and with work experience in an MNC or overseas.

I did not tick any of these boxes. I was almost 50 years old.

I went to a government college in Tirunelveli, a small town in interior Tamil Nadu, and I had never worked for an MNC or in USA. The investors were probably shocked at (a) how I could, with such a poor background and unimpressive profile, co-pioneer an industry and (b) how I still managed to be around for so long without raising billions of dollars.

Asking me to get out of my company was the best way of resuming normal service.

Most investors cannot evaluate a startup with perfect insight at the initial stage; so they resort to the easier option of pedigree investing. If a startup founder matches their typical entrepreneur profile, investors decide to put money in them. Further, most funds also employ associates, senior associates, vice-presidents, and managing directors with similar pedigree and, hence, today you have this nice closed loop where investors and entrepreneurs are all from the same batch of the same institute and before they can recall who won their hostel basketball finals, there’s a term sheet on the table.

Pedigree-based investing is not as clever as it sounds. Over 80% of venture capital funds are garnered by start-ups with a pedigree background. Over 90% of all start-ups in India will fail. Therefore, over 72% of all pedigreed start-ups will go down.

In reality, 72% failure rate is terrible. If you were averaging 28% in school, you would still be in school.

Pedigree investing has another drawback. It wrongly assumes that the country’s smartest young people are restricted to students of select engineering and management institutes. I have no doubt that we can find bright young potential entrepreneurs in arts and commerce institutes as well. I have the same complaint against the government’s ambitious Startup India programme—all their state centres are only in top engineering colleges. When India is trying to encourage entrepreneurship, we must spread the net much wider.

Excerpted with permission from Rupa Publications India Pvt Ltd.