Poor ideas and poorer engineers are killing Indian startups

Not moving up anymore.
Not moving up anymore.
Image: EPA/Jagadeesh NV
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India isn’t able to nurture its startups to their full potential.

All the odds are in India’s favor: The world’s fastest-growing major economy has been ranked the third-best destination for technology investments. From Microsoft to Uber, Silicon Valley bigwigs are all setting up offices and development centers in the country. The Indian startup sector is teeming with “soonicorns”—soon to be unicorns (private billion-dollar startups). At the start of 2016, prime minister Narendra Modi launched the Startup India initiative to improve the ecosystem for budding companies through tax exemptions, reduced red tape, patent reforms, better funding channels as well as avenues for incubation and training.

According to“Entrepreneurial India,” a new IBM Institute for Business Value (IBV) report, more than 76% in a survey of over 1,300 Indian executives—600 startup entrepreneurs, 100 venture capitalists, 100 government leaders, 500 leaders of established companies and 22 educational institution leaders—believe that India’s economic openness is a major business advantage. Six in ten recognized that India’s skilled workforce as an asset for businesses. Calls to slash the corporate tax rate from 30% to 25% is “expected to further boost startup activity,” IBM notes.

But despite all the efforts, the industry is built on a flawed foundation. More than 90% of startups in India fail within five years of founding, according to IBM.

The melee of newbies

Aping successful business models is doing the nascent startup industry little good in finding its own bearings.

More than  77% of venture capitalists interviewed by IBM cited the lack of pioneering innovation as a major reason for startups fizzling out. “Indian startups are prone to emulate already successful global ideas,” the report notes. The homegrown Olas and Flipkarts and Snapdeals are proof.

Finding and holding on to the right talent is another big hurdle. Technical institutes in the country churn out 1.5 million engineering graduates each year, but fewer than 5% of them are deemed employable. For years, India’s limited tech talent has also been subject to brain drain. Even though that trend is reversing, it will take years for the effects to show. Especially since startups have lost their grip on Silicon Valley veterans who returned to partake in the dynamic environment. Seven in ten of the venture capitalists in IBM’s survey believe that “talent acquisition is one of the biggest challenges faced by Indian startups, and limited availability of necessary skills impedes growth.”

Startups are also grappling with a funding crunch, according to 65% of the venture capitalists. In the quarter ending March 2017, the volume of initial angel and seed investments more than halved to 120 compared with 245 deals in the same period in 2016. And Series A funding, traditionally secured right after seed funding to expand user bases and develop the businesses, declined 65% in deal value from a year ago.

A lack of knowledgeable and experienced mentors and amateur founders added to the troubled mix.

Bringing back a conscience

Poor business ethics often put investors and founders on different pages, fracturing entire businesses.

Founders often get away with misrepresenting their financials, obscuring future plans and exuding their disregard for regulatory constraints, Economic Times reported. Eventually, the lines between business funds and personal wealth get blurred. (It’s no wonder that India’s richest men also head some of the biggest companies.)

“Thinking of that money as their own, as opposed to taking care of it because the capital is vested in a company or to build a certain technology, affects the organisation, and how people are treated,” Nipun Mehrotra, chief digital officer, IBM India and South Asia, told Economic Times.

Kartik Hosanagar, professor of marketing at the University of Pennsylvania, blames a combination of India’s “overall jugaad mentality” (a makeshift attitude) and “poor governance” for the flouting of laws and the inaccuracies in financial data. For instance, the lack of an active board can mean some of the issues like financial misreporting can go unnoticed.

“Largely, good investors stay out of the way and let founders do their thing. Excessive interference only hurts startup progress,” says Hosanagar. “But a complete absence of governance can be bad too. First-time entrepreneurs can benefit from some hand-holding.”