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Will 2018 be kind to startups in India?

Startups face a number of challenges when embarking on their entrepreneurial journey – according to NASSCOM data, the standard mortality rate is around 25%.

In 2015, about 140 startups shut shop in India; in 2016, about 212 startups closed doors—50% higher than the previous year; the rate for 2017 planed out to 25% as large-scale startup hubs, accelerators, and investors cropped up across the country. To help the sector, government went to the extent of redefining the meaning of a “startup” by raising the age limit to 7 years from the date of incorporation (10 years for Biotech firms). From linking villages with the Start-up India programme to mega-sized accelerators and spirited investors, a slew of regulatory changes, activities and initiatives helped the startup sector emerge as the next big theme for economic growth.

Today, India is among the top five countries in the world in terms of startups. Its consumer demographics and extensive urbanisation continues to channel large-scale investment opportunities. The number of tech and non-tech startups cropping up every year only continues to the rise, irrespective of the shutdowns. It is projected that by 2020 there will be over 12,000 startups in the country, changing the way the markets are perceived and work. Until 2016, it was a trend among investors to make an early entry, even before the start of a firm. However, 2018 started on a bleak note with the causality list taking on a more serious turn: a Hong Kong-based tech startup accelerator, Jaarvis, started writing off investments in its portfolio and shutting down its India operations. Other startup accelerators in India are not doing good as well and are taking parting shots in getting their business model right. All this begs the question: Is there a market for all these startups?

According to an analysis report of startup postmortems, the first and topmost reason for startup mortality was ‘a lack of market need’ for it. Most failed startups relied on perceived solutions to implied needs. Market research was comfortably ignored, placing the onus on VCs to do the due diligence. For many startups, obtaining the seed fund was an end in itself. As seven out of ten well-funded startups failed, it also debunked a major myth; Scalability. Most of the high profile startups that shut down shop grew too fast and expanded even faster, so scalability to meet the demand was not the problem. Soon, the reality struck.

India’s vast unorganised market was a logistical nightmare to even companies having a strong network and financial backing. High smartphone penetration seems to incorrectly warrant more tech solutions. However, tech solutions were considered low-risk by investors, only to have them make a hasty retreat within a year or two.

As Prime Minister Modi’s “Startup India” is nearing completion of two years, startups are already yearning for the magic of 2015 when they savoured being the flavour of the season, which saw the emergence of a number of home-grown unicorns across the country. However, a new class of investors are stepping in to bring about the turnaround. For instance, organisations such as Tata Trust are planning to help startups in India that are categorised as high-risk and have uncertain business models. This is a space where no angel investors or venture capitalists would put their money in. For a change, these investors are looking forward to support ideas having a social impact. As one official put it candidly – in order to have a deep and irreversible impact, one has to try different things, and not use the same approach again and again. The coming days will witness the funding companies taking the lead from the startups. But will it energise the sector? One only needs to wait and watch what 2018 holds.