Poor business ethics, lack of innovation are key reasons for failure of startups in India: IBM study

By Sainul Abudheen K for e27

Majority VCs surveyed believe that many Indian startups lack pioneering innovation and are prone to emulate already successful global ideas

India may have all the ingredients for startups to grow and flourish, but not everything is hunky-dory here.

According to a study conducted by IBM Institute for Business Value (IBV), more than 90 per cent startups in India fail in their first five years due to lack of innovation and poor business ethics. Inadequate formal mentoring, funding crunch, and lack of skilled workforce are the other key reasons for failure. the ‘Entrepreneurial India’ study finds.

The research is based on a survey done in collaboration with Oxford Economics, to understand the rapidly evolving India startup ecosystem and its effects on the wider economy. IBV interviewed more than 1,300 Indian executives for the study, including 600 startup entrepreneurs, 100 venture capitalists, 100 government leaders, 500 leaders of established companies and 22 educational institution leaders to analyse the macro impact of startups on the economic growth of the country.

“Startups are redefining the Indian economy by being the catalysts for technology innovation and collaboration. The Indian startup community is ranked third globally in terms of number of startups has been creating new job opportunities and attracting capital investment. We believe that startups need to focus on societal problems like healthcare, sanitation, education, transportation, alternate energy management and others, which would help deal with the issues that India and the world face. These require investments in deep technology and products which are built to scale globally,” said Nipun Mehrotra, Chief Digital Officer, IBM India/South Asia.

“At IBM, we work closely with startups, VCs, incubators, academia, and individual developers to foster a culture of innovation and disruption and provide access to deep technology such as cognitive, blockchain, cloud and other emerging technologies, as well as the business mentoring needed for their growth,” he added.

India’s startup community is expanding rapidly with a strong entrepreneurial culture, especially among millennials. Strong government promotion of entrepreneurship has strengthened a rapidly evolving startup culture – a proposed reduction in corporate tax from 30 per cent to 25 per cent is expected to further boost startup activity. The study further stated that market valuation of Indian startups has grown significantly over the past four years, with three times increase in startup investment recorded in 2015.

According to the study, approximately 35 per cent of startups are being set up in tier two and tier three cities, thereby promoting accelerated development and industrialisation of rural and other less developed areas.

Top roadblocks for India’s startups

Despite India’s entrepreneurial strength, the startup economy still has not reached full maturity and more than 90 per cent of startups fail within the first five years.

• Lack of innovation: As many as 77 per cent of venture capitalists surveyed believe that many Indian startups lack pioneering innovation based on new technologies or unique business models. Indian startups are prone to emulate already successful global ideas.
• Lack of skilled workforce: Almost 70 per cent of the venture capitalists believe that talent acquisition is one of the biggest challenges faced by Indian startups, and limited availability of necessary skills impedes growth. As per a study, 80 per cent of engineering graduates in India are deemed unemployable and 48 per cent of employers in India face difficulty in filling vacancies.
• Lack of sufficient funding: Indian startups face funding roadblocks both at entry and exit stages while successful global startup ecosystems are well supported by active investor communities. About 65 per cent of venture capitalists revealed that funding is one of the major challenges for these companies.
• Other roadblocks include inadequate formal mentoring, poor business ethics and lack of experienced leadership.