What Ails the Indian Startup Ecosystem? A Brief History, Current Sate and Future Outlook.

Have been reading and writing so much about the state of the Indian startup ecosystem with commentary on specific companies considering this so called #fundingwinter and the general issues prevailing. Have been thinking of preparing a detailed report on the same but haven’t been able to due to limited time bandwidth. Still, some things which come to my mind, having been engaged with all stakeholders at large in various capacities as a founder, operator and now an advisor, since almost a decade.

First a bit of history:

The Indian start-up ecosystem has come a long way since the early days of outsourcing and IT services in the 1990s. Today, India is home to one of the world's fastest-growing start-up scenes, with a vibrant ecosystem that includes angel investors, venture capital firms, incubators, accelerators, and government initiatives.

The tech journey can be traced back to the 1990s, when the IT services industry was just starting to take off. In the early days, Indian start-ups were focused primarily on outsourcing and IT services, serving the needs of multinational corporations in the US and Europe. However, with the advent of the internet and the rise of e-commerce, the landscape began to change.

In the early 2000s, Indian entrepreneurs began to realize the potential of the internet and started launching start-ups in areas such as e-commerce, online travel, and digital payments. Over the years, the ecosystem has grown to include a wide range of start-ups across sectors such as, E-commerce, Healthtech, Fintech, Edtech, Agtech, and more.

Some of the key players in the Indian start-ups ecosystem include:

• Angel investors: Indian angel investors have been instrumental in providing early-stage funding to start-ups, and many have become successful entrepreneurs in their own right.
• Venture capital firms: Indian venture capital firms have become increasingly active in recent years, providing crucial growth capital to start-ups at later stages. Some of the top VC firms in India include Sequoia Capital , Accel , Z47 and Kalaari Capital .
• Incubators and accelerators: Incubators and accelerators play a crucial role, providing early-stage start-ups with mentorship, resources, and support as they work to scale their businesses. Some of the top incubators and accelerators in India include nasscom 10000StartupsIndia and @Zone Startups India.
• Government initiatives: The Indian government has been increasingly supportive of start-ups, with initiatives such as the @Startup India program, which provides funding, mentorship, and other support to start-ups.

Some of the successful startups (On scale, not profit) include Flipkart , Ola, Paytm , Zomato , and BYJU'S . These companies have not only disrupted traditional industries, but also become global players in their respective sectors. Some notable exceptions that have bucked the trend of losses and reliance on VC money include early incumbents like MakeMyTrip , BookMyShow , InMobi Advertising , Zoho , IndiaMART InterMESH Limited , Zerodha and a few others but they remain few and far in between.

However, many of these startups continue to be loss-making and not sustainable even after years of existence. This is despite the fact that India is home to a massive population and market size, which presents a significant opportunity in itself. The public markets too have rejected the lofty valuations at which they entered the market – more so, because the founders & early investors had already milked the returns. I wrote about this here : https://lnkd.in/dvYzNj7b. ?Other issues which have now become systemic which I can think of after analysing data and being an active participant in the ecosystem over the years (In no particular order):

• Lack of innovation: Many Indian start-ups tend to focus on replicating successful business models from the West, rather than developing innovative solutions that address local needs. In the early years, starting with Flipkart, we had the aggregator models come into play (After the Amazon model) and several others across sectors just copied that. While it was the need of the hour to develop concentrated market models given how fragmented and broken , each sector was – the end result was a stifling innovation ecosystem as copy/paste seemed more viable. That has continued over the years. This is also the primary reason for our homegrown start-ups to not achieve that global status, both in scale & reach as the Big Tech players in the U.S or even China which also copied but then localised and exported their tech. Plus, they focussed on being a manufacturing hub which we didn’t.

• Fragmented Market: India is a large and diverse country, with different languages, cultures, and consumer preferences. This made it challenging for startups to build products and services that cater to the needs of a vast and fragmented market. The early one’s focussed on the middle class educated, English speaking Indian consumer which actually wasn’t as big a market that the Chinese, for example targeted. Plus, focusing only on one part played in big part in both the reach and revenues. To create value and impact, one has to either go to the top tier premium category and make it mass (Apple) or go to the lower mass market and commoditise it (Coca Cola). Being in the middle didn’t help the cause.
• Market saturation: In recent years, many sectors in India, such as e-commerce and ride-hailing, have become highly competitive, with a large number of players vying for market share. This has led to intense competition and pressure on startups to reduce prices, which has in turn led to heavy losses.
• Lack of focus: Some startups are trying to tackle too many problems at once, like all Fintech companies want the Loan market (which is already dominated by big banks & NBFC’s and hard to break into meaningfully) plus over dependence on customer data which is homogenous after a point. This lad to a lack of focus and a failure to build a sustainable business. This also resulted in heavy losses as startups try to pivoted, stay afloat in a highly competitive environment.

• Talent scarcity: While India has a large pool of talent, there is still a dearth of super skilled professionals in some key areas, such as engineering and product management. This makes it difficult for startups to build strong teams and execute their ideas effectively. Also the intrapreneurial culture which led to paypal mafia is missing – the whole corporate structure is geared towards doing rather than thinking + doing. We need more thinkers.
• Regulatory hurdles: The Indian regulatory environment can be complex and difficult to navigate, with regulations that may have slowed down the growth of innovative ventures to come out. For example, the recent regulatory changes in the e-commerce sector have affected the growth and profitability of many players in the space. Also, the lack of clarity in the Crypto (Broadly Blockchain) and Gaming sector has also hampered innovation and evolution of these industries.
• Lack of access to capital: While there has been a surge in venture capital investments in Indian startups, access to capital remains a challenge for many startups. This is particularly true for startups in non-metro cities, where the ecosystem is not as developed. At the same time, excess capital which was concentrated only in a few sectors or companies due to FOMO has led to gross indigestion and we see the after effects where the companies haven’t been self-sustainable and heavily dependent on VC money even after years of existence. To become more self-sustained, Indian startups need to focus on building sustainable business models that generate revenue early on by:

a) Focusing on customer needs: Startups need to identify specific customer needs and develop products and services that meet those needs. This can help them build a loyal customer base instead if enticing customers with deep discounts which results non loyal behaviour and fight of over-burn between incumbents.

b) Developing unique offerings: Startups need to develop innovative and unique offerings that differentiate them from competitors. No need to re-invent the wheel but think of the market as a pizza – surely one can innovate with toppings.

c) Leveraging technology: Startups should leverage latest technology to automate processes and be less dependent on human capital. New tech like AI & robotics eliminates the need for many old processes and those that have a 1st mover advantage here will stay far ahead of competition.

• Capital burn: “The Elephant in the Room” Startups raised large amounts of capital to fund their growth, but this capital was quickly depleted as they spent excessively on marketing, deep discounting & celeb advertising without matching revenues or achieving PMF. This is IMO, the #1 reason and which is why we are where we are today. more start-ups die of indigestion than hunger! And that’s why what’s happening today with a focus on unit economics, efficiency and profitability is good – that’s how it was supposed to be.
• Fiscal Prudence: Many startups fail (ed) due to a lack of fiscal prudence. Founders must resist the temptation to spend lavishly on non-essential expenses and focus on building a lean and efficient organization. Those 1st class tickets and expensive team offsites can surely wait till one hits decent revenues.
• Corporate Governance: Another critical factor that determines the success of startups and has come into prominence with stories from Bharatpe, GoMechanic etc. Founders must establish a strong corporate governance structure to build trust with investors and stakeholders. Founders need to put in place very early on or after the 1st funding round, an independent board of directors, establish transparent reporting mechanisms, and ensure compliance with all regulations. Startups must be transparent about their financial performance and provide clear and accurate information to investors. VCs must conduct due diligence to verify the claims made by startups and ensure that the valuations are realistic and based on accurate information.

“Enough to satisfy every man's needs, but not every man's greed.”

• Founder and VC Greed: Another Elephant in the room and a big White one which no one likes to speak of: Without naming names, we all know of enough stories of this happening fairly regularly and some excellent PR keeps this from coming out in the open till some wronged insider becomes a whistle-blower. Founder and venture capitalist greed has been a contributing factor to high, unrealistic valuations of startups. In the pursuit of high valuations, founders were tempted to inflate their revenue or user numbers, which led to unrealistic expectations from investors and a subsequent inability to meet those expectations.
• High valuations also created pressure on founders to prioritize growth over profitability, which resulted in unsustainable business models. Companies burned through cash at an unsustainable rate to acquire new customers, resulting in losses that are now difficult to recover from without causing harm or taking of hard decisions like layoffs and spinning of businesses. On the other hand, venture capitalists also had their own incentives to invest in high valuation startups. VCs typically invest in multiple companies, and their returns are determined by a few home runs, rather than a portfolio of steady performers. As a result, VCs were more willing to invest in high-risk, high-reward companies with unrealistic valuations, hoping that one or two of their investments will generate significant returns. Ultimately, building sustainable and successful businesses should be the priority for founders and VCs, rather than chasing high valuations. This requires a focus on long-term success and sustainable growth, rather than short-term gains from inflated valuations.
• Role of Every Stakeholder: Finally, the success of Indian startups is dependent on the role played by every stakeholder. The government must provide support by providing tax incentives, reducing regulatory burden, and investing in infrastructure that supports entrepreneurship. Investors must provide support by investing in startups across the board and not restricted to certain sectors or develop a cult of founders. Founders must focus on building sustainable business models, and employees must invest in building the skills required to take the company to the next level. Currently everyone is playing musical chairs and serving their own needs rather than being inter co-operative.

Some people also compare the Indian ecosystem to the Silicon Valley which is being unfair but given the rapid technologic advancements in this century, that is natural. Everyone expects things to happen at a faster pace which is why, things turned out the way they did. One has to bear in mind that the Silicon Valley startup ecosystem has been around since the mid-20th century, with the creation of companies like Fairchild Semiconductor and Intel in the 1950s and 60s. Over the years, the ecosystem has grown and evolved to become one of the most successful and innovative startup ecosystems in the world, with a long history of successful companies and a deep pool of experienced entrepreneurs, investors, and advisors. Two Primary Reasons:

• Network effects: It has strong network effect, with many successful entrepreneurs and investors working together to build and support the ecosystem. This has created a supportive environment for startups and has helped to foster innovation and growth. People tend to collaborate more than outburn or out compete each other.
• Innovation: Silicon Valley is known for its culture of innovation, with a focus on pushing boundaries and disrupting traditional industries. This has enabled many startups to create new markets and to grow quickly in the tech giants with trillions of dollar value.

Despite these differences, the returns on investment in the Indian ecosystem can still be as attractive as those in Silicon Valley, due to the large and growing market, the lower cost of living, and the lower cost of doing business.

Indian startups face (d) several challenges, some self created, some inherent to the market that have contributed to many of them being loss-making even after years of existence. To become self-sustained, founders need to focus on building sustainable business models that generate revenue early on. This requires fiscal prudence, a focus on innovation, and a strong corporate governance structure. With the right support from the government and the ecosystem, Indian Tech can become self-sustained and less reliant on venture capital.

Looking to the future, the potential is enormous. With a large and growing market, a supportive ecosystem, and a talent pool that includes some of the world's best engineers and entrepreneurs, India is well positioned to become a hub for innovation and entrepreneurship in the years to come. But the issues I listed above, need to be stemmed and eventually cut out from their roots.

In conclusion, the Indian entrepreneurial ecosystem has come a long way since its early days, and today it is home to a thriving ecosystem that includes successful startups, supportive investors, and a growing number of government initiatives. With its large market, talented workforce, and supportive ecosystem, the future of the Indian startup ecosystem looks bright, and it is well positioned to continue to grow and thrive in the years to come.

Phew ?? ! – Thought I’d just give an overview but ended writing this long novelistic take on the whole thing. Happy to hear out other divergent views and let’s all strive to make Indian Startups and the Tech industry at large a hub of innovation, massive value creation and a force to reckon with Globally.

Cheers & Happy reading! ??

Amit is a 25-year+ Entrepreneur turned Consultant. He is currently the Director,Practice Growth at?Factoryal, a Boutique Management consultancy helping entrepreneurs in their growth journeys…

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