FAILURE OF STARTUPS
Author: Vineet Gangasagar
Importance of Startups
Pathania and Tanwar (2024) explains that the startup ecosystem in India is rapidly improving, marked by a significant increase in the number of startups, a more favourable environment, and better investment opportunities. This growth is driven by a wide range of innovations that combine technology-based solutions with advancements at the grassroots level. Entrepreneurship plays a crucial role in driving economic growth and development by creating job opportunities, boosting national production, enhancing international competitiveness, and improving quality of life. Entrepreneurial startups, in particular, focuses creativity and innovation while navigating unforseen conditions. These early-stage companies focus on developing new products or services, often through technology and innovation to create new offerings.
Factors
Goswami, N (2023) emphasized Indian studies on startups often use common research methods, such as structured questionnaires and convenience sampling. George and Padmadas (2020) conducted a study on Kerala startups, highlighting that internal factors—like insufficient entrepreneurship promotion, lack of mentorship, and persistence—were more influential in startup failures than external factors. Indian companies face several challenges, including socio-cultural issues, regulatory and economic policies, recruiting difficulties, fundraising problems, environmental concerns, and multi-window clearances (Habeebuddin & Sakriya, 2018). Poor mentoring, infrastructure, and market conditions also contribute to failures. To avoid early closure, startups need customer acceptance, to follow industry trends, and to manage unforeseen challenges (Kurode et al., 2019; Kanchana et al., 2013). Kalyanasundaram et al. (2020) used statistical tests to identify traits of successful entrepreneurs and startups, such as serving customers, securing funding, and collaborating with the right people. The number of startups a founder has been involved in, their perseverance, and entrepreneurial skills all influence the value of their experience.
Entrepreneurship After Independence
Koshy and Perumal (2019) states that after independence, India’s economic policy focused on state ownership, with the government taking on the role of the primary entrepreneur. Many public sector units were established, while the private sector operated under strict regulatory controls, licenses, and an environment shaped by corrupt bureaucracy. Starting a business was particularly difficult, especially for those not from business families. Entrepreneurship policy was incorporated into the industrial policy resolutions, starting with the Industrial Policy of 1948, which was later revised in 1956 to address socio-economic goals. The policy was further modified in 1973, 1977, and 1980 to meet evolving challenges and promote industrial growth and development.
Importance of Incubators
Sharma et.al (2020) explains that incubators play a crucial role in supporting new enterprises during their early stages by offering a range of services. These services typically include access to physical resources (like office space), office support services, capital, process support, and networking opportunities. They may provide shared office spaces, a pool of shared services, networking, and coaching. According to Hackett and Dilts (2004), incubator services can be categorized into three models:
1.Landlord Model: Offers physical resources such as office spaces, conference rooms, and high-speed internet at lower costs for new businesses.
2. Educational Model: Focuses on providing training to address gaps in the entrepreneur’s knowledge, such as legal and financial aspects. This training can be delivered through accelerators or bootcamps.
Overall, incubators help startups by providing both physical and educational support.
Improper use of Incubators
Joshi et.al (2020) says that academic incubators have traditionally focused on providing physical resources like infrastructure, but to truly support startups, they need to offer additional services such as mentoring, access to financial institutions, business networks, and investors. Technology Business Incubators (TBIs), which provide access to specialized equipment for product testing and manufacturing, have not yet gained widespread attention despite government support. Startups may fail to fully utilize incubator resources for several reasons. Entrepreneurs may be hesitant to use resources if they perceive them to be of poor quality, such as lacking experienced mentors or underdeveloped networks. Additionally, incubators sometimes fail to align their offerings with the specific needs of individual startups, providing generic services that don’t match the entrepreneurs’ requirements. Entrepreneurs may also fail to recognize gaps in their own resource base, preventing them from taking full advantage of the incubator’s resources. Furthermore, incubators often overlook the differing needs of startups at different stages of growth, offering similar support for both early-stage and growing ventures, when different types of interventions are needed.
Problem of communication
Rumler et.al (2019) emphasizes that throughout the life cycle of a startup, the importance of different stakeholders varies, and each group has unique interests when interacting with the company. Early on, a startup’s products may still be unclear or subject to change, which can alter the stakeholders involved, such as potential customers or suppliers, requiring a flexible communication approach. Many startups fail to recognize that poor communication is often the core issue behind difficulties or even failure. This article focuses on communication challenges during the early stages of a startup. The method involves reviewing literature to analyze the stages of startup development, identifying stakeholders at different phases, and considering industry-specific variations. It will also explore common reasons for startup failure, particularly due to communicative errors.
Challenges
Dhingra S (2023) says startups face several challenges when adopting a data-driven culture like
1. Data Collection and Testing: Collecting customer data can be difficult due to shifting goals and fast-paced changes within the startup. The data gathered may become obsolete or irrelevant over time, making it harder to utilize effectively.
2. Data Quality: Even with a data-driven mindset, startups often struggle with poor data quality. This could result from collecting the wrong type of data, the product failing to meet initial goals, or attracting an incorrect customer base.
3. Data Privacy: Startups must establish strong data security and privacy protocols. Without clear guidelines, customer data could be exposed, potentially damaging the company’s reputation and leading to regulatory violations.
4. Talent and Skill: The lack of skilled professionals can hinder the development of a data-driven culture, leading to substandard practices and slower company growth.
5. Regulatory Challenges: Startups may face government regulations that limit the types of data they can collect, narrowing their scope for data analysis.
6. Limited Customer Insight: Startups often need more data to assess the effectiveness of their product experiments. For instance, testing a hardware product on a large scale may present challenges compared to testing digital products.
7. Systematic Integrity: Ensuring that all products (digital or hardware) are integrated and connected is crucial for aggregating data effectively, providing a comprehensive view of the data generated across various systems and products.
These challenges make it difficult for startups to fully adopt a data-driven culture, impacting their ability to scale and make informed decisions.
Sustainability
De Silva et al (2022) explains that business challenges are recurring obstacles that hinder the success of business models and need to be addressed to foster innovation and sustainability. Sustainable systems are particularly challenging due to the complex range of environmental, economic, and social factors that must be considered throughout their life cycle. When analyzing business models, companies are encouraged to focus on three key elements: value proposition, value creation and delivery, and value capture. This involves reflecting on corporate behaviour, responsibility, and performance, defining resources for key activities, and analyzing stakeholders and their economic context.
Challenges because of FDIs (Foreign Direct Investments)
Slyvester et al (2023) states the problem created by FDIs
Local startups face several challenges due to Foreign Direct Investment (FDI):
1. Increased Competition: Local startups may struggle to compete with foreign firms that have advantages in scale, technology, quality, and reputation. Foreign firms can crowd out local startups by dominating resources, finance, suppliers, and markets, and may even imitate local innovations, undermining their competitive edge.
2. Dependency Risks: Overreliance on foreign investors for funding and resources can make startups vulnerable to changes in investor sentiment, political instability, or economic crises. Foreign investors may withdraw or impose conditions that limit startup autonomy, and exchange rate risks could impact financial stability.
3. Unequal Partnerships: Startups may face power imbalances when collaborating with foreign investors, leading to unfavourable terms, such as high returns demanded by foreign investors or reduced autonomy for local startups. This dependency could limit flexibility and adaptability.
4. Loss of Intellectual Property: Sharing technology or knowledge with foreign investors poses risks of intellectual property theft or loss of ownership rights. Foreign investors may exploit local startups’ innovations or claim patents on their behalf, leaving startups unable to benefit from their own creations. Compliance with international intellectual property laws can also add complexity and cost.
Overall, FDI introduces competition, dependency, and risks related to intellectual property and partnerships for local startups.
Technology Problems
Arora et al says that Deep tech startups often struggle to attract risk capital for several reasons. Their success may rely on regulatory changes and the development of complementary infrastructure, which they are less equipped to handle. Additionally, the underlying technology is often expensive and difficult to de-risk, and there may be supply-side frictions in the availability of risk capital. Despite the booming venture capital sector, investment in deep tech startups remains behind other sectors. A complementary explanation for this struggle is the balance between technical and commercial challenges. Startups tend to excel at solving technical issues, while incumbents are better at addressing commercial challenges. When both technical and commercial challenges are involved in an innovation, the project is less attractive to investors. Deep tech startups struggle because they create significant value but are privately less valuable, making it harder to attract venture capital.
Conclusion
The startups get affected by some internal as well as external factors. Internal factors like improper level of management, difficulties in doing proper communication, technological problems etc. FDIs changing climate no proper research of market demands and supply of products and its substitute. In conclusion, startups in India play a pivotal role in driving economic growth, innovation, and job creation. However, despite their potential, they face numerous challenges, including internal obstacles like poor mentorship, funding difficulties, and market conditions, as well as external factors like regulatory constraints and competition from foreign investments. While incubators provide vital resources, their effectiveness is often hindered by a mismatch between offerings and startup needs. Communication failures, data challenges, and sustainability concerns further complicate the path to success. To support the growth of startups, it is essential to address these challenges, provide tailored mentorship, and create a more conducive environment for innovation. By improving the infrastructure, policies, and resources available to entrepreneurs, India can unlock the full potential of its startup ecosystem, fostering a future of sustainable growth and global competitiveness.
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