Over 90% startups in India fail in the first five years because of lack of innovation, dearth of skilled workforce and fund crunch, says a study by the IBM Institute for Business Value in collaboration with Oxford Economics.
Based on interviews with more than 1,300 Indian executives, including 600 startup entrepreneurs, 100 venture capitalists and 100 government leaders, the study aimed to understand the country's rapidly evolving startup ecosystem and its effect on the wider economy.
As many as 77% of the venture capitalists surveyed said that most Indian startups lacked pioneering innovation, i.e., new technologies or unique business models, and they were just emulating already successful global ideas.
Seven in 10 venture capitalists felt talent acquisition was one of the biggest challenges faced by Indian startups, and limited availability of necessary skills was impeding growth. The report also cited another study that said as many as 80% engineering graduates in India were "unemployable."
In terms of funding, too, Indian startups face roadblocks at both entry and exit stage. In contrast, successful global startup ecosystems are well supported by active investor communities.
However, it's not all doom and gloom.
More than 76% executives said India’s economic openness was a major business advantage. Almost six in 10 said the country's large domestic market provided significant advantages.
The study stated that market valuation of Indian startups has grown significantly over the past four years, with startup funding rising three-fold in 2015. It also said that approximately 35% startups are being set up in Tier 2 and 3 cities, promoting development and industrialisation of rural and less developed areas.
“We believe startups need to focus on societal problems like healthcare, sanitation, education, transportation, alternate energy management and others, which would help deal with the issues that India and the world face. These require investments in deep technology and products which are built to scale globally”, said Nipun Mehrotra, chief digital officer, IBM India/South Asia.
The study stressed on the need for proactive engagement between startups and established organisations—it can help the former harden their business models, accelerate growth and leapfrog into the big league while enabling established companies to experience the entrepreneurial spirit of innovation and agility.
The report adds that while strong government promotion of entrepreneurship has strengthened the startup culture, the proposed reduction in corporate tax from 30% to 25% will likely boost startup activity further.