The start-up world is often seen as the fount of innovation and entrepreneurship. But one of the biggest challenges facing start-ups now is the high rate of failure.

According to a study by CB Insights, only one in 10 start-ups survive for 10 years. In recent years, there have been several high-profile cases of start-ups vanishing, leaving investors and employees high and dry. According to news reports, over 2,000 start-ups shut down in India in 2022, a rise of 20 per cent from 2021. So why do many start-ups fail?

Poor product-market fit: A start-up’s product or service may fail to match the needs of its target market. This could be due to lack of market research, a misunderstanding of the target market, or a market change. For example, the start-ups which are located in rural areas and rely on the digital infrastructure should account for the concerns their target consumers have in mind.

Socio-cultural factors: Indian start-up founders have not treated investors’ money with the same degree of caution as their Western counterparts. Further, in some start-up cultures, it is seen as acceptable to engage in unethical or illegal practices which can be termed as the culture of silence. In India, questioning the actions of the superior is very rare and hence the culture of silence.

Overexpansion and challenges in talent retention: Some start-ups fail because they grow too quickly. This can lead to cash flow issues, employee fatigue, and a loss of focus. This is also because of the unrealistic ambitions of the founders. Start-ups rely largely on talented people to generate innovation, implement business strategy, and navigate the competitive landscape.

However, Indian entrepreneurs have substantial problems in attracting and retaining talented workers. Due to limited resources and tough competition from established organisations, start-ups frequently struggle to acquire outstanding people.

Market saturation, regulatory and policy challenges: The start-up ecosystem in India is fiercely competitive. Lack of product distinction, failure to build a distinct value proposition, and entry into crowded markets with established incumbents can all lead to start-up failure.

While competition encourages innovation, it also poses a considerable danger to businesses which fail to differentiate themselves successfully and acquire a meaningful market share.

Navigating the complex regulatory landscape in India is often a daunting task for start-ups. Cumbersome bureaucratic processes and ambiguous policies can stifle innovation, impede growth, and increase compliance costs for start-ups.

The way forward: While Indian entrepreneurs have achieved amazing success in recent years, the ecosystem’s shortcomings emphasise the need for reflection and learning. Entrepreneurs must emphasise rigorous market research, get appropriate capital, implement sound financial management techniques, and focus on attracting and maintaining top people to reduce the chance of failure.

Furthermore, tackling regulatory problems through government initiatives and streamlined laws can create an atmosphere conducive to start-up growth. To ensure the long-term success of companies, the Indian start-up ecosystem must cultivate a culture of transparency, innovation, mentorship, collaboration and strong ethical norms.

Saravanan is Professor of Finance and Accounting at IIM Tiruchirappalli, and Williams is a project manager – ESG at Good Vision Seva Trust