Lessons from the start-up ecosystem

With the proliferation of interoperable technology, it was possible to set up startups – activities driven by first-level scalable business ideas. Under company law, a startup is defined as a private company incorporated under it and recognized in accordance with the notification issued by the Department for Promotion of Industry and Internal Trade (DPIIT). The business model of startups usually rests on identifying a technology-based unique product or service for which there is a perceived demand.  Its operational model rests on the process of connecting product offerors/service providers with consumers using a technology platform – usually apps. The algorithm of the app is developed by the startup entrepreneur and is built upon the value proposition of the product fulfilling the user’s needs. It could be a single product or could be a combination of interconnected products. For example, Uber taxis in India now work as delivery agents moving parcels for callers. Swiggy brings home food from restaurants and gets groceries from a customer-chosen shop like a delivery agent.

The success of a startup will rest on its ability to deliver value to the user in the form of both convenience and cost efficiency on a sustainable basis. Start-ups are technology-driven, lean, and smart entities based upon minimum assets, minimum capital, and high collaboration with gig workers taken on board. Recognizing the immense potentiality of technology and widespread internet and mobile connectivity among the masses, business-to-business (B2B) and business-to-consumer (B2C) are now possible through digital mode.

1. Formal Startup Ecosystem:

With India emerging as a fast-paced global technology innovation hub, the Startup India campaign has been launched by the DPIIT, the government of India in 2016 to harness the full potentiality of the startup ecosystem. As part of providing ease of doing business for the startups, the number of procedures to incorporate a company in India was reduced to 3 as against 10 earlier in 2020. The time taken to incorporate a company has also been reduced to 4 days as against 18 days earlier.

The Government also launched a Startup India Online Hub in June 2017 which is one of its kind online platforms for all stakeholders of the entrepreneurial ecosystem in India to discover, connect and engage with each other. The Online Hub hosts Startups, Investors, Funds, Mentors, Academic Institutions, Incubators, Accelerators, Corporates, Government Bodies and more.

The number of entities recognized as startups works out to 84,012 by the DPIIT as on 30th November 2022. By 31^st May 2023, the number of startups increased to over 90000 working in 670 districts in India. India is home to 107 unicorns with a total valuation of US $ 340.8 billion. Out of them, 44 unicorns were added in 2021 and 21 in 2022. India is now the 3^rd largest startup ecosystem in the world. US and China staying ahead.

2. How Startups differ:

Startups are driven by entrepreneurs using technology taking more risks with a lean and flexible organizational structure. The structure, policies, and procedures evolve over a period of time depending upon the scalability of the business. The core founding team works like partners with flexible norms. They engage gig workers/outsourced workforce to deliver and service the product. In many cases, the product innovators – the startup owners have a weak link with the product delivery team that may suit in its formative stage. But when the scale of operations increases, there is a need to fix accountability for performance at all stages. Since the scalability of organizational structure and delivery is cost-sensitive, the startup entity may not be able to afford it. But the innovation of a technology-led, low-cost structure may need a huge revamp to cope with the growth. It is at this stage that the startup entrepreneur, many times is not able to manage the transition and risks of growth.

At this stage, if asked to explain why a promising new venture eventually stumbled, most are inclined to cite the inadequacies of its founders—in particular, their lack of grit, industry acumen, or leadership ability. Putting the blame on the founders is tantamount to oversimplifying a complex situation. Drilling down into the operational dynamics is necessary to nail the reasons.

Compared to startups, conventional commercial entities have a historical track record of operations supported by well-laid organizational structure, hierarchy, policies, time-tested procedures, processes, rules, audit, transparency, and accountability drilling down to standard operating procedures. The products and services offered by the organization and its delivery system are well integrated with an umbilical connection with the ethos of the organization whereas, in startups, the entrepreneurs and its delivery team are not usually integrated with the organizational value system. They are built to grow but startups have to reinvent to grow and then build. That brings the difference between conventional entities and startups.

3. Common challenges:

Taking a cue from a couple of case studies of startup failures discussed in Harvard Business Review (HBR), the common challenges could be pinpointed towards lack of (i) funding at the nick of time when the promise of scalability is visible.  (ii) Industry experience and technical expertise leading to weak strategic interventions. (iii) compatible governance structure to grow on the planned pathway.  In augmenting the collaborative value chain, the reasons for failure cannot be attributed to one.

A broad set of stakeholders, including employees, strategic partners, and investors, all can play a role in a venture’s downfall. Many entrepreneurs who claim to embrace the lean start-up canon actually adopt only part of it, neglecting to research customer needs. Entrepreneurs should conduct a competitive analysis, including user testing of existing solutions, to understand the strengths and shortcomings of rival products.

For example, Lido Learning – an ed-tech startup had grown initially become the first tech startup to do so in 2019. But later experienced funding problems when one of the investors withdrew and its merger efforts failed leading to its bankruptcy. Similarly, ShopX a B2B e-commerce startup failed due to financial crunch. The BYJU’s, online tuition center has been in crisis, which may be due to its inability to manage the complexities of the scale and size of its operations and funding. The weaknesses erupted in the corporate governance of Bharatpe and the exit of its co-founder Mr. Ashneer Grover from the fintech is well on record.

4. Way forward:

Taking a cue from the startup ecosystem operating in India – its highs and lows, they can be better shaped and well entrenched in the economy.  The Company Law Committee (CLC) set up by the corporate affairs ministry in September 2019 is likely to look into various aspects of the regulator regime of startups. Startups have been provided with various relaxations including exemptions from procedural compliance requirements. In navigating the 5^th Industrial Revolution, the existing and potential startups and unicorns can adopt disruptive technology tools to do business in new and better ways. Sustainable transformation is the challenge to foster greater social impact. Robotic process automation (RPA) and intelligent process automation (IPA) will be the cornerstone of sustainable business models. Thus, while technology continues to play an enabling role but human resources will be the differentiating factor in improving corporate governance and driving the vision. Balancing risks and aspirations will need the focused attention of not only the founders but the extended team of the entity.

According to a Mckinsey Report – ‘In the context of innovation, IPA can mimic activities carried out by humans and over time learns to do them better. Traditional rule-based automation is augmented with decision-making capabilities thanks to advances in deep learning and cognitive technology.

Going forward the compliance burden is expected to come down to provide better ease of doing business facility to them. Learning from the past, Startups will have immense scope in the coming years where risks and rewards have to be well balanced on the plank of sturdy corporate governance and pursuable vision.

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