There is lots of news in the media on the failing startups. Those who survived are downsizing, they are letting the same people go they had hired and trained few months ago. (http://economictimes.indiatimes.com/small-biz/startups/layoffs-in-startups-whats-the-other-side-of-indias-entrepreneurship-story/articleshow/54268511.cms). Some 4,000 employees who lost their jobs have not been paid for the last two months. Situation is bad as many of the startups which had flared up hope are running out of cash.
Very few, probably less than 10% are able to stay afloat and scale-up. Well, this is entrepreneurship and this is how it works everywhere you might say. But before that let us see what is hurting these and why they are running out of money too soon. I am no entrepreneur, do not have first hand experience of running a start-up but the this is what I found as plain facts that are hurting the infant companies.
o Failing to come up with a marketable product: Though VC’s provide funding to start the startups, they expect these new companies to generate cash flow in a few months time. It is necessary for these start-ups to at least cover their operational expenses. When the product development gets delayed beyond expected timelines or if it fails and the next round of funding does not come in, it is time to shutter down the business.
o Overestimating the market: Steve Jobs had said no market research will help him as no one has seen the products he is building. True, his bets worked out, the whole world became his market and now we call him a genius. Had his idea failed, even his family members would have called his smart phones dumb. Market is ruthless. If product is well received, people will queue up and wait to get the new, fancy thing. Else, it is difficult to get back even the expenses of a product launch. If a product will succeed and if it succeeds, what would be the market size will just remain an estimation. There is no way to know the right market size until you get there. There is always a risk of market research becoming trash. Higher the estimate, higher is the risk.
o Excess Capacity: This is related to above fact but yet the right man-power planning is difficult to estimate too. Let us say there is a new market and there are three players. If one company grows to dominate the whole market, it needs to scale-up while the remaining two will have to downsize. One company had got it right while the other two failed. Like the Mughal princes, they fight for the crown, one will get it and the rest will have to rest in coffin or have to co-exist in a smaller capacity.
Is this a really bad situation? Yes, for those founders of failed startups, employees who have lost their jobs and the investors who burnt out their money. All businesses will have a risk-reward trade off. But the start-ups are like infants and the infant mortality numbers are high in this industry.
Get out of this grim mood, you will notice the changing face of India. We never had these many numbers of new companies getting started in the history of India. Now there are more people taking risks despite the odds of seeing success is slim. Capital is available to realize an idea while it was limited against income or collateral before. Those failing are teaching entrepreneurial lessons to a bigger population who would want to test the start-up industry. The new comers will have to come with better and realistic plans on how to make their idea work and pay their investors and not just their employees.
This phase and pain was part of the evolution which is taking place. I do not expect the number of risk takers to slow down. But I do see that the new business plans will be robust as convincing the investors and employees to believe in them will not be an easy task. It was not easy task before but the checks will become more as the idea goes through more validations. And the strongest will survive and thrive.