90% of Indian Startups Will Fail Because of Lack of Innovation, Study Says

26 May, 2017 / Articles

Of late, India might have become the third-largest startup ecosystem, but it lacks successful innovation.

Notwithstanding the fact that market valuation of Indian startups has grown significantly over the past four years, a recent study, “Entrepreneurial India,” by the IBM Institute for Business Value and Oxford Economics found that 90% of Indian startups fail within the first five years. And the most common reason for failure is lack of innovation — 77% of venture capitalists surveyed believe that Indian startups lack new technologies or unique business models.

Other reasons cited for failure include lack of skilled workforce and funding, inadequate formal mentoring and poor business ethics, according to the study.

It’s well known that most Indian startups are prone to emulate successful global ideas, by and large fine-tuning an existing model to serve local needs. There’s Ola for Uber, Gaana for Spotify, OYO Rooms for Airbnb and Flipkart for Amazon.

India doesn’t have meta-level startups such as Google, Facebook or Twitter. On the other hand, China, with which India often compares itself, built its own Google named Baidu and Alibaba displaced Amazon. Unsurprisingly, in 2016, Asian Paints was the only Indian organization in Forbes’ 25 most innovative companies, and Gillette India was among Forbes Top 25 Innovative Growth companies.

“Since 2015, as many as 1,503 startups have closed down in India. And the major reason is due to the replication of Western business models, and not lack of subsequent funding from the investors,” says Rishabh Lawania, founder of Xeler8, a market intelligence platform recently acquired by a Chinese venture capital firm. The highest number of failures were in logistics, e-commerce and food technology.

Copying existing models

Initiatives such as Make in India, the Startup India program, the establishment of the Ministry for Skill Development and Entrepreneurship, the Intellectual Property Facilitation Centres and other incubation programs may have spurred growth, but it’s no secret that innovation remains the biggest missing piece of the Indian startup puzzle.

“Many new high net worth individuals [HNIs] without proper due diligence invested in startups having flawed business ideas, which led to massive failures in the last two years,” Lawania says. “Angel investors and early stage VCs have had their fingers burned far too many times, but not anymore. They have now mastered the art of diligence and are making quick and informed decisions.” Even in evolving AI technology, Indian entrepreneurs are not pioneers.

“AI and ML technologies have been adopted in retail and banking as well, but India is a follower market — what you see in the U.S. today will start appearing here tomorrow,” says Navneet Sharma, co-founder and CEO of Artifacia, a visual intelligence platform.

Undoubtedly, India’s startup ecosystem needs top notch technical talent and global business skills. Unlike Israel, India is not investing in R&D through international cooperation between different countries that helps in establishing links between local companies, multinationals and academic institutions. In 2016, a survey conducted by the Information Technology and Innovation Foundation (ITIF), a U.S.-based think tank, ranked India near the bottom of a list of 56 countries on global innovation. The ITIF study revealed that the country’s poor performance in developing human capital is mainly because of its failure in investing on education. The IBM report cited another study that said as many as 80% engineering graduates in India were “unemployable.”

Filing patents

Also, if a yardstick of innovation is the patent, then India is miles behind its Asian counterparts. India filed 1,423 international patents in 2015-16, while Japan filed 44,235, China 29,846 and South Korea 14,626 , according to the World Intellectual Property Organization. Over 70% of the patents filed in the country are by MNCs; Indian companies and academia share the remaining 30%.

Currently, India ranks 66th on the Global Innovation Index (GII) list, which is 41 places behind China. The GII report said India has the ingredients needed to become a global driver of innovation, including market potential, talent pool and an underlying culture of frugal innovation, but “relative weaknesses exist in the indicators for business environment, education expenditures, new business creations and the creative goods and services production.”

Emphasizing innovations on societal problems, Nipun Mehrotra, chief digital officer, IBM India/South Asia, said: “We believe that startups need to focus on healthcare, sanitation, education, transportation, alternate energy management and others, which would help deal with the issues that India and the world face.”

However, it’s not all doom and gloom. The IBM report adds that in addition to strong government promotion of entrepreneurship that has strengthened the startup culture, India’s economic openness and large domestic market are significant advantages.

The science man and innovator, Fernando Fischmann, founder of Crystal Lagoons, recommends this article.

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