Reasons for Failure of Start- Ups or Why does a start-up fail?

People in India are constantly coming up with new startup ideas. Everyone wants to start a business, and everyone wants to make a billion dollars with their business. But, unfortunately, it isn’t as simple as it appears. It is not as simple as it appears in movies and web series, and newly established start-ups are facing major challenges and got demolished or get failed.

Short Glimpse

The domestic startup ecosystem is not without hope. Many startups are doing exceptionally well, but many of their talented founders lack confidence. While the primary reason for 9 out of 10 startups in India failing in 5 years is a lack of funds, startup founders compound their problems by not knowing how to make the best use of funding. Unfortunately, in India, funding still operates in the same way that money lending did in the past. Founders are frequently hesitant to hire professionals who can accurately evaluate their business and provide adequate funding.

Other funding-related issues that Indian startups face include founders miscalculating the best time to attract funds. Founders frequently approach investors too soon or too late. Asking for funding too soon may prevent investors from determining whether a business is viable, whereas investing too late means returns will be significantly lower than if money was invested earlier.  Before we shall we move on to discuss the points regarding the failure of Start-up, let us first understand the meaning and concept of Start-Up in India. 

Meaning of Start-Ups in India

A startup is a business that is run by a single person or a small group of people who work together to solve problems. Essentially, the formation of such a start-up can be seen on the grounds when the founders of any existing company discover problems in the company’s existing system and intend to solve such problems by forming their own company or entity. Furthermore, a start-up registration can be done when the company’s founders come up with a potentially great idea or they may come to the conclusion that the start-ups currently provide inferior services or do not want to sustain it further.

The Definition of the startup

Any company that meets the following criteria falls into the Startup category and is eligible for DPIIT benefits.

• Age of the Company: The date of incorporation for the company should not be older than ten years.
• Company Type: Your company is either registered as a Private Limited Company under the Companies Act, 2013 or as a Partnership Firm under the Indian Partnership Act, 1932, or as a Limited Liability Partnership under the Limited Liability Partnership Act, 2008.
• Turnover Limit: The Company’s annual turnover is less than Rs. 25 crores.
• A New Business Entity: The Company must be brand-new; it cannot be the outcome of a merger or reorganization of an earlier company.
• Innovation-friendly: The startup should be focusing on innovation, the creation of new goods or services, or the improvement of already-existing ones.
• DIPP Certificate: Obtaining a certificate from the Inter-Ministerial Board, which was established by the DIPP, is essentially necessary (Department of Industrial Policy and Promotion).

Benefits of setting up of Start-Up in India

 The following are the benefits of setting up of Start-Up in India:

• Simple Process: The Indian government has introduced a website and mobile app for quick startup registration. Any company can launch a startup by completing a brief online form and uploading all necessary paperwork. The registration process is carried out entirely online.

• Self-Certification: Startups participating in the program are permitted to certify themselves as compliant with three environmental laws and six labor laws. Such certification is permitted for a period of five years following the entity’s incorporation.

• Simple access to money: The government has established a fund worth 10,000 crore rupees to serve as venture capital for new businesses. In order to encourage banks and other financial institutions to provide venture capital, the government also provides a guarantee to the lenders.

• Cost reduction: The government offers a list of trademark and patent facilitators. It offers low-cost, high-quality intellectual property rights services, such as quick patent examination. The government will cover all facilitator fees, and the startup is responsible for paying all statutory fees. The startup benefits from the 80% reduction in the cost of filing patents as a result. Providing a 50% discount on trademark filing in comparison to other businesses.

• Simple rules for Public Procurement: Startups are eligible to apply for government contracts. They are exempt from the “prior experience/turnover” requirement that applies to other businesses responding to government tenders.

• A waiver of Taxes: If the Inter-Ministerial Board certifies the startups, they are exempt from income tax for three years (IMB).

• No lengthy compliance procedures: People who invest their capital gains in venture funds that the government has established are exempt from paying capital gains taxes. As a result, the startups are able to draw in more and more investors.

• Benefits of Research and Development: Startup India conducts research and promotes innovation among those who envision becoming entrepreneurs in the near future. For the purpose of conducting product research and development, the government is committed to establishing seven new research parks.

• Easy winding up of the company: Startups, also referred to as fast track companies, are able to be wound up in 90 days (3 months), as opposed to 180 days for other companies. Additionally, a professional insolvency practitioner must be hired in order to liquidate the assets and pay the creditors. To be eligible for such an exit, this must be completed within six months of the application’s submission.

Let us now discuss what are the reasons for the failure of start-ups in India

Why does a Start-Up fail?

Starting a business is difficult, and the fact that 90% of them fail in the first three years makes it seem even worse. Entrepreneurs who are wise always try to avoid the mistakes of others when starting their own businesses.

The following is a list of the most frequent causes of startup failures:

• Market Issues: Every startup is driven by the market; the market has an unmet need or a gap in the market that your idea can fill and generate a respectable profit from.
  But it can be challenging to pinpoint the right market and issue. You run the risk of wasting all of your time and resources if you try to solve a problem that neither exists nor is important.
  The timing of when you release a solution also affects its demand. Hotstar would have unavoidably failed if it had been introduced in 2009, a year with very low internet and Smartphone penetration.

• Failed business model: The foundation of every business is its business model, which determines whether it will be profitable and valuable in the market. Some businesses tend to ignore the business model because they are so focused on the solution. A business model that is inefficient has a high customer acquisition cost (CAC), a low or unknowable customer lifetime value, and no scalable customer acquisition methods.

• Poor Team Management: The majority of the time, management serves as the company’s brain and heart. Weak strategic decisions, a communication gap between management and the team, little to no work on product market fit, and poor hiring practices are all examples of poor management.

• Running Low On Money: No matter how enthusiastic you are, how many customers you have, or how brilliant your concept is, cash flow is what keeps the business going. You still need to pay your workers’ dues, and marketing agencies’ fees, and settle your debts. Some business owners neglect to keep accurate records, which prevents them from timely taking the necessary actions.
  The founders of companies that get funding from private equity firms and other outside investors should be well aware of the KPIs they must demonstrate for the next investment, such as their burn rate. Failure to meet KPIs and carrying out unplanned costs with low ROI might cause the business to fail.

• Negative Product Experience: Great user interfaces like slack, Gmail, Trello, etc. are commonplace. Great apps like WhatsApp and Zomato have advanced product development and permanently pampered their users. If your product has a poor user interface, processes slowly, or requires more clicks than necessary, it will be very difficult for you to dominate the market. Customers should be able to distinguish your product from competitors based on both the experience and the product’s value.

• Poor Marketing: A great product may fail if there are insufficient marketing efforts behind it. Today, marketing efforts go beyond simply increasing consumer awareness of a product’s features to include developing marketing components within the products themselves and utilizing previously untapped channels like influencer marketing and retargeting.

• Focus Sliding: Founders are big on ideas, and they frequently overthink them. This might result in resource waste and distraction in major enterprises. Some firms try to diversify too fast or start concentrating on too many topics at once. Micromanagement is another factor that might contribute to a lack of attention.

• Conflict Among the Team Members: Although founders and other team members are also people, and all people have emotions, self-centered thinking and overly emotional behavior can ultimately cause disputes that erode a company’s culture and values, which results in failure. The last thing a business or its investors want to witness is founder disagreement.

• Legal Obstacles: Every company is now aware of the importance of consumer privacy and data protection thanks to the recent Facebook and Cambridge Analytica incident. Many companies have a variety of legal issues as they develop. Startups should at the very least be familiar with the many regulating rules that each place may have.

• Poor Debts: In their early stages, the majority of startups consent to operate on credit, which frequently worsens the business’s circumstances. It is sometimes challenging to avoid credit inquiries in order to demonstrate initial traction. In such cases, if the client behaves dishonestly or experiences financial difficulty, your firm will suffer.

• Inability to Turn: Most founders fall in love with their concepts and solutions, which prevents them from making a timely change. The act of fixing an issue should be the only focus of founders. Google has found a solution for how to organize the world’s information and provides you with an easy method to access it. It progressed from being merely a directory to a sophisticated search engine and is now a digital assistant.

Remedies to avoid the failure of the Start-Up

Following are the remedies to avoid the failure of the Start-Up:

• Keep an eye out for both favorable and negative remarks.
• Don’t go too far. Please make a decision and devote your full attention to it.
• Develop a solid grasp of the qualities and attitudes of your target market regarding your offers.
• Before engaging in costly marketing tactics, use word-of-mouth to recruit new consumers.
• Create a connection with your consumers.
• You cannot and should not aim to please everyone.
• If you lack the requisite talents, delegate leadership to someone else.
• Learn about it and put it to use.
• Choose a mentor to help you build your leadership abilities.
• Plan their employment processes well.
• Create alternative working tactics, such as collaborating with skilled individuals to perform assignments on a freelance basis.

Takeaway

There are hundreds of startups in India, some of which will become successful in the upcoming years. Any business with an innovative idea and competent founders has the potential to succeed anywhere around the globe. However, for the time being, the cited hurdles are preventing Indian companies from reaching their full potential.

While finance is the root cause of many businesses failing in India, there are some unique startups that bring together investors and founders and help entrepreneurs to make a case for investment. Founders present their company’s concept and how it offers value during such discussions; if investors feel a business is feasible, they may agree to invest the money sought by the startup. In exchange, investors receive a stake in the company.

Legal Window has a team of professionals dedicated to providing you with the greatest support, on-time delivery, and the highest level of customer satisfaction during the Start-Up Registration process. For Start-Up Registration and Compliance services, please contact our team at 072407-51000 or admin@legalwindow.in.