We all know it – if your friend is starting a new venture, odds are very high that the venture will never see its second birthday. Start-ups are fairly easy to start if you have the guts to face uncertainty, and even easier to crash and burn even if you have a killer product or service to offer.
A start-up’s journey may get over prematurely if a product- market fit is not found or if the fledgling outfit is unable to meet its cost through fundraising or revenues from sales. However, rarely do start-ups fail because of such purely economic reasons or plain bad luck.
Much more frequently, the reasons of failure are very much avoidable and just a matter of oversight or missteps. This is the stuff every entrepreneur’s nightmare is made of.
I have myself seen a bunch of start-ups crashing or burning out due to expensive legal mistakes. However, I will talk about these at the end.
When I wanted to write this article, I went and asked some of India’s most well-known start-up experts about their thoughts on this. I asked each of them to give me their top 3 reasons of why start-ups die. Some of them are people I often turn to for advice. I trust you will find their advice useful too, and maybe ensure that none of these reasons come in the way of your start-up success.
#1 Amit Grover
Amit Grover is the CEO and Founder of Nurture Talent Academy, IIT Delhi and IIM Indore alumnus. He has worked with Infosys, Asian Paints, Onida and Mumbai Angels earlier. According to Amit – “People jump with excitement at the thought of new ideas and believe that they can change the world. However, they need to realize that they need continuous improvement and focused execution effort to make their dreams come true. While doing all these, it is important to keep the key team members together.”
As a former legal counsel who worked often with start-ups, I agree with Amit 100%. Co-founder’s conflict is the most common reason of start-ups shutting shop, becoming weaker or failing to execute. Co-founders may leave abruptly as their expectations are not met. They may stay and fight instead of focussing on growing the business. Co-founders often feel that the company is not doing well enough because of the lack of performance, commitment or (insert any other crucial contribution needed from co-founders) of the other founders.
Another majorly avoidable reason for co-founder conflict is absence of a written co-founders’ agreement or shareholders’ agreement. As long as rights, obligations and expectations are not reduced to black and white (ink on paper, signed by all parties) – they remain grey and unclear – potential relationship minefield!
I asked Amit to specify top 3 reasons why start-ups fail, and this is are the top 3 reasons he cited:
1. Team issues and non-alignment of priorities
2. Lack of flexibility in changing vision, plan or execution
3. Lack of external support like mentoring, financing etc.
Abhishek Rungta is founder of IndusNet Technologies, a massive web-design and social media marketing start-up that has flourished over the years. He is also a founder of Seeders, a seed fund where he has mentored many startups.
Abhishek had an entirely different set of reasons. He cited lack of persistence, lack of meaningful research into the business, and absence of proper and practical guidance from battle hardened mentors as the top 3 reasons why starups die in India. According to him, most b-plans do not have a plan-b. And hence, things start falling apart when they face their first hurdle that throws their plan off the track.
Notably, all these reasons are very avoidable. It is naïve to get into business assuming that everything will go according to plan. The plan is just a benchmark; almost nothing ever goes exactly according to a plan in a country like India. The internet business is growing and changing faster than ever. Those who cannot adopt and improvise cannot survive this marketplace.
A few days back, my friend Anuroop Omkar, a trusted legal advisor to many of India’s leading entrepreneurs, said something very similar to me: “Whatever strategy you are having, in all probability it has a sell by date. If you cannot re-invent yourself, you are unlikely to survive.” At iPleaders, this question of how we can re-invent ourselves to provide even more value to our customers has to be answered by the co-founders every once in a while and guides almost all our strategy decisions.
I also asked the same question to Arijit Bhattacharya, Founder of VirtualInfocom and Secretary of TiE Kolkata. An entrepreneur for over 16 years, Arijit founded India’s first B2B portal on game development (www.virtualgamedeveloper.com), and he is also Co-Founder of Sportszonein. Arijit mentors entrepreneurs and is a very popular speaker on subjects like How Scale up a Business, How to Start Smart etc.
He said that there are a different set of reasons that kills product start-ups and service start-ups. According to him, usually service industry start-ups die as they don’t have long term vision. Product making start-ups are few anyway, but they can sustain only if they can manage proper marketing or find a publishing partner which gives then access to a good market share. However, lack of plan and proper market study as well lack of fund for marketing plague all start-ups in India.
Pankaj Jain is founder of Impact Law Ventures, which is a law firm that comes right on top of venture capital deals table in volume every year. Pankaj works with more entrepreneurs than anyone else than I know and as a legal advisor, has played an important role in settling many disputes involving some of the most well-known start-ups and investors in India.
Pankaj had 3 elaborate reasons to cite:
Failure to find the right giants
Typically, one of the reasons that you see far in life is because you stand on the shoulders of giants. Giants, here, include your members of the board, advisors, mentors and consultants. Failure to find such giants often contributes to premature demise, especially as the ecosystem is still evolving.
Fear of failure
As a civilization, we have an unholy fear of fear, when there is nothing to fear but fear itself. Near-death experiences in start-up journey are crucial in giving it strength. What keeps me personally going is that “you learn from your first start-up, earn from your second start-up and give back from your third start-up”.
Failure to hire people who work harder and smarter than you do
I realize that there is a fundamentally inherent distrust of and in “teams”. We are often trained to be individual champions, not work well in a team. The lesson that I have learnt is that always hire people who are smarter than you are, and work harder than you do and learn to trust them to do the job.
Here are my top reasons why start-ups die in India
I have some of my own reasons to cite as well. I agree with all the above reasons and still want to highlight a few others. A few weeks back I had written on how India is one of the most difficult countries to do business in. A few people said that what I wrote in the last article did not illustrate some of the big problems they faced quite adequately. This time let me share a few real life situations.
A friend of mine runs a manufacturing business where he has 3 more partners. One of the partners has started a competing business. He barely contributes his time to the business and still continues to take a share in the profits. They do not have co-founders’ agreement or a AoA that has a non-compete clause preventing partners from running a competing business. As a result, all the partners are no unhappy. They want to kick out the guy running a competing business, but have no legal way to do it. It is only a matter of time until they have a showdown and probably most will leave the business.
Do you have a co-founders’ agreement or some such written agreement that covers the rights and duties of the founders/promoters of the business? If not, god bless!
Start-ups also die because after an initial success, they sometimes divert from what has been really working and start focussing on many different things instead of scaling what really worked out in the first place.
Another way to screw up a good start-up is to mismanage funds and cash flow. If you hire people too fast, invest in technology or infrastructure that you cannot afford or spend too much on a car and an office, chances are that you are too immature to make it yet.
Another major reason for a lot of businesses failing is regulatory flipflop and uncertainty. Consider the case of my own start-up. We work with a few universities, which have to follow UGC guidelines. Very often, UGC guidelines are unclear, and at the moment they are not processing new applications for recognition of distance education courses from new universities. This is a big constraint on our business, because if Universities cannot start new courses, we cannot do our work as enablers of online education for Indian universities and there is little we can do about it.
This is a problem with all the online payment start-ups who are at the mercy of RBI for instance, or all the carpooling websites which may be made illegal by the motor vehicle department of any state or the night food delivery service that can be harassed by the police. If you have not figured out the regulatory issues in your sector, you are probably not prepared for the worst that could happen to your business. Uber is facing some regulatory heat at the moment after an Uber driver allegedly raped a woman in Delhi.
If you want to learn how entrepreneurs can handle crucial legal and regulatory matters better, you can check out this course for entrepreneurs along with one of India’s top law school National University of Juridical Sciences, Kolkata.
I hope your start-ups continue to thrive and you find some useful lessons from this article to take away and implement. If you can think of some reasons that we missed, please write in the comments. If you think someone you know may benefit from this article, please share it with them!