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Why Do Startups Fail? A Case Study Based Empirical Analysis in Bangalore

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In an entrepreneurial ecosystem, the failure rate of startups is extremely high at 90%, and every startup that fails becomes an orphan. This phenomenon leads to higher costs of failure for the entrepreneurs in the ecosystem. Failed startups have many lessons to offer to the ecosystem and offer guidance to the potential entrepreneur, and this area is not fully explored compared to the literature on successful startups. We use a case based method distinguishing a failed startup and a successful startup, studying the entrepreneurial characteristics and firm level factors which cause the failures, in the technology startup ecosystem of Bangalore. We study one of the modes of exit adopted by failed startup entrepreneurs and draw key lessons on causes that culminate in failures. We have identified that factors such as the time to MVP (Minimum Viable Product) cycle, time for revenue realization, founders’ complementary skillsets, age of founders with their domain expertise, personality type of founders, attitude towards financial independence and willingness to avail mentorship at critical stages, will decisively differentiate failed startups from the successful ones. Accordingly, implications have been derived for potential entrepreneurs for reducing the cost of failures in the entrepreneurial ecosystem. Keywords: Startups, failure, causes, exit, entrepreneurship, characteristics, firms, factors, ecosystem, bangalore, India
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Asian Journal of Innovation and Policy (2018) 7.1:079-102
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Why Do Startups Fail? A Case Study
Based Empirical Analysis in Bangalore
Ganesaraman Kalyanasundaram
*
Abstract In an entrepreneurial ecosystem, the failure rate of startups is extremely
high at 90%, and every startup that fails becomes an orphan. This phenomenon leads to
higher costs of failure for the entrepreneurs in the ecosystem. Failed startups have many
lessons to offer to the ecosystem and offer guidance to the potential entrepreneur, and
this area is not fully explored compared to the literature on successful startups. We use
a case based method distinguishing a failed startup and a successful startup, studying
the entrepreneurial characteristics and firm level factors which cause the failures, in the
technology startup ecosystem of Bangalore. We study one of the modes of exit adopted
by failed startup entrepreneurs and draw key lessons on causes that culminate in
failures. We have identified that factors such as the time to minimum viable product
cycle, time for revenue realization, founders’ complementary skillsets, age of founders
with their domain expertise, personality type of founders, attitude towards financial
independence and willingness to avail mentorship at critical stages, will decisively
differentiate failed startups from the successful ones. Accordingly, implications have
been derived for potential entrepreneurs for reducing the cost of failures in the
entrepreneurial ecosystem.
Keywords Startups, failure, causes, exit, entrepreneurship, characteristics, firms,
factors, ecosystem, bangalore, India
I. Introduction
Prospective entrepreneurs come with innovative ideas and convert them into
business opportunities by establishing their startups. Entrepreneurial startups
generate new employment and provide avenues for creative potential
utilization as they technovate by blending the power of technology and
innovation. Entrepreneurial intentions help the creation of firms and they
become the prime mover in the economic growth of nations (Global
Entrepreneurship Monitor, 2017).
Submitted, August 27, 2017; 1st Revised, November 27, 2017; Accepted, February 28, 2018
*
Research Scholar - External Research Program, Department of Management Studies,
Indian Institute of Science, Bangalore-560012; ganesaramank@iisc.ac.in
Asian Journal of Innovation and Policy (2018) 7.1:079-102
DOI: http//dx.doi.org/10.7545/ajip.2018.7.1.079
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An economy needs more and more startups to prosper into larger
corporations to fuel growth. When more entrepreneurial firms join the fray,
growth of entrepreneurship, employment and economy follow. The
entrepreneurial path of converting startups into established large firms poses
numerous challenges. Only a few entrepreneurs can go against the tide and
achieve success. In general, the survival rate of startups established by
entrepreneurs is low (Pena, 2002), leaving many startups exposed to the
hardship of failure. About “90% of startups fail in the first 5 years” as observed
in the US context (Forbes magazine, 2015) and the phenomenon is the same in
the Indian context as well (Business line, 2017). The situation may not be
widely different in other economies.
The failure of startups impacts entrepreneurs as well as the firm established
by them. The repercussions of entrepreneurial failure go beyond the firm and
impact employment and economy. The entrepreneurs who meet with failures
are high in number and the lessons they have learned when shared will help
potential entrepreneurs in the ecosystem to craft their path to success. The
ecosystem should ensure that the cost of failure is small and the founders
should be allowed to innovate (Bala Subrahmanya, 2015). Entrepreneurial
learning is a fundamental requirement for an entrepreneur as it drives the
startup to success (Startup Genome Report, 2017) and it will benefit the
ecosystem (Watson, 1998).
A successful startup will have sufficient revenue to cover its costs, but a
failed startup will be unable to generate sufficient revenue likewise. It has cash
flow issues and poor long-term prospects leading to discontinuance of its
operations. At the macro level, minimizing the failure rate will help both firms
and entrepreneurs to succeed in their startup efforts. At the micro level,
identifying the causes of failure will help in establishing failure proof
mechanisms, reducing the socio-economic cost of failure and the lessons
learned known as epiphanies will help future entrepreneurs (Singh, 2015).
This paper, we will first cover the literature on entrepreneurial success and
failure. We will examine entrepreneurial characteristics and firm level factors
that differentiate failed startups from the successful ones during the startup
evolution. We will identify research gaps and formulate our research
objectives. We will analyze our research objectives with four case studies in
detail comprising B2B and B2C sectors (one success and one failure from each
sector). The study is confined to tech startups in Bangalore, the highest ranked
startup ecosystem in India, globally (Startup Genome Report, 2017). We will
delve into what propels to become an entrepreneur while trying to differentiate
successful and failed startups. We will highlight the causes of success or
failure, one of the modes of exit strategy opted by startup entrepreneurs, the
outcome of startup failure, and explore on how they did resolve it resolutely
and how they did continue to contribute back to the ecosystem. We will derive
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inferences from the case studies with our propositions, which will carve the
path for future research.
II. Literature Review
We have examined the empirical literature focusing on different dimensions
of startup entrepreneurship, including exploration of the factors contributing to
firm success and causes of failure. Subsequently, we explored the issues
relating to startup life cycle, its entrepreneurial characteristics and factors,
causes of startup failure and the mode of entrepreneurial exit.
1. Startup Life Cycle
To examine the critical factors determining success or failure of startups, it is
essential to understand the life cycle of startups in general, and technology
startups in particular. The startup evolution has a life cycle and the tech startup
evolution goes through a series of stages (Carter, 1996) requiring execution
precision. Broadly, the life cycle of tech startups would comprise three stages,
namely, emergence, survival and stability, and success and accelerated growth
(Bala Subrahmanya, 2017). It is pertinent to understand the critical issues
involving each of these three stages.
(1) Emergence: It involves establishing a POC (proof of concept) where the
product focus is high. The entrepreneur himself funds the cost of POC, in most
cases. Perceived opportunity versus viable business concept (Politis, 2009)
gets ascertained with POC and provides the entrepreneur with an MVP
(minimum viable product). The startup must intensify marketing efforts to
identify the target market (either B2B or B2C) and earn revenue. A right
marketing effort will be the biggest investment in building the brand in the
market (Kakati, 2003) and should lead to early revenue realization.
(2) Survival and stability: The product market fit established helps the firm
to move into the next orbit and the entrepreneur attempts to capture new
market while retaining existing customers. Moving to external sources of funds
and identifying the right funding partner are given focus here. At this stage, the
financial requirements will be of a higher magnitude, while maintaining the
focus on execution of operations (Gatewood, 1995).
(3) Success and accelerated growth: The product has attained the required
maturity and the revenue stream is well established. Market exploration for
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accelerated growth both nationally and internationally is attempted here (Bala
Subrahmanya, 2017).
The challenges to be addressed by the entrepreneur vary in magnitude
depending on the stage of the tech startup. Given the different stages in the life
cycle of tech startups, it is pertinent to examine what are the plausible factors
that differentiate success and failure of tech startups. The most important of
them are the characteristics of the entrepreneurs themselves.
2. Entrepreneurial Characteristics and Factors
Entrepreneurs may have inherent characteristics (financial skill, business
skill, technical skill, personality traits) that push them to pick challenges and
execute them (Gartner, 1999). The acquired characteristics (skills and
competency through the job, prior consulting career, sector experience) give
them the confidence to explore new opportunities (Cope, 2000). A few
entrepreneurs overcome the fear of failure (Morgan, 2014) and augment their
inherent characteristics with their learning task and acquire additional skills
and competency before they embark on the entrepreneurial journey (as
described in Table 1).
When the acquired characteristics and inherent characteristics are high, the
startup evolution is easier and the startup is formed. When the acquired
characteristics and inherent characteristics are low, the startup will not take
birth and it is a non-starter. When the acquired characteristics are high and
inherent characteristics are low, fear of failure will dominate and the
emergence of the startup will get delayed. When the acquired characteristics
are low and inherent characteristics are high, the partnership will be required to
get the startup moving.
Table 1 Learning task of entrepreneur
Acquired Characteristics
High
Low
Inherent
Characteristics
Entrepreneur
Partnership
Fear of Failure
Non-Starter
Source: Cope, 2000; modified by author
Entrepreneur in their efforts to establish the startup, should manage multiple
challenges, while having limited resources at their disposal, and the proportion
of factor requirements varies based on the stage in which the firm is operating
(Chorev, 2006). They have a few variables under their control known as
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internal factors. Internal factors are within the reach of the entrepreneurs and
they have command over them such as finance, market, product features,
human resources and they can vary the same to get the desired outcome. They
have a few variables beyond their control known as external factors such as
government policy, quality of mentorship and these factors can influence the
outcome (Khelil, 2016). The entrepreneurs have limited resources and they
need to allocate the resources in a judicious manner to maximize the returns to
meet their business plan. Any mismanagement of the factors can cause failure
and we will focus on understanding the same.
3. Causes of Failure
The execution of a proposed business plan involves managing the factors
efficiently at each stage to deliver the required product or service at the
appropriate time. Uncertainty surrounding the decisions can lead to actions or
inactions (Shepherd, 2003) and there are two possible scenarios such as failing
to act when action is required and acting when inaction is required. A failure is
the inability of an entrepreneur to achieve the desired results (Politis, 2009). A
failure is an event characterized by a steady decline in revenue and a steady
increase in the cost of a firm. An entrepreneur will have turbulent times in
managing this difficult situation. At this stage, mobilizing additional funds
through debt or equity will be a major challenge. This would call for additional
personal investments leading to subsequent family pressure. One more option
available to the entrepreneur is to initiate a management change and this may
curtail his power in the startup (Shepherd, 2009). The entrepreneur has the
emotional attachment to the startup and the product they have created and it
restricts them to change the management from the founder team to a
professional management team. The entrepreneur blocks the transition from
the quality of idea to the quality of management, and it is one of the key
reasons for the value of the firm going down due to emotional factors
(Shepherd, 2011).
A failure as viewed by an entrepreneur is different from how other
stakeholders view it. The view from venture capitalists, employees, customers,
suppliers and the market can be completely different. In most of the cases, the
internal stakeholders interpret the failure of the firm as a failure of the
management pointing to the entrepreneur who is managing the firm (Mantere,
2013). However, most of the venture capitalists may be forgiving and do not
associate the failure with the entrepreneur, but this failure tolerance varies
across geography, being high in the US and low in the UK (Cope, 2004).
However, in the western world, broadly speaking, failure is conceived as an
“accepted way of life and a learning opportunity” while the eastern world sees
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it as a “death sentence” (Cotteril, 2012).
The lessons learned by the entrepreneur involve intense feelings as he or she
is fully involved with the emotional event and the learning involves two
components. First, entrepreneurial learning leads to personal development and
the change taking place at the individual level. Second, firm learning leads to
business development and the change taking place at the business level. It is
the parallel process of personal development and business growth and involves
proactive reflection (Cope, 2000) by the entrepreneur. The learning from
failure is not instantaneous and automatic, and it requires coping techniques
(Cope, 2011) to come out of the grief (Jenkins, 2015). The coping techniques
should lead to complete recovery and it is marked by the absence of negative
emotional response (Singh, 2007). A positive attitude towards failure and
higher acceptance of failure should help the entrepreneur to gain more insights
and enable them to explore the mode of exit.
4. Mode of Exit of Entrepreneur (Exit from Firm or Ecosystem)
Rational entrepreneurs should terminate failing investments as soon as
possible, but they continue to commit resources to a failing course of action.
Self-justification theory shows that people in charge of investment decisions
have the tendency to justify a failing course rather than interrupt it when they
realize the upcoming financial setback (Brundin, 2013). The entrepreneurial
exit is not a sign of failure and it is a career choice and it is liquidation of an
investment. The probability of exit and type of exit matter (Wennberg, 2010)
and the same are depicted in Table 2.
Table 2 Taxonomy of exit routes
Performance
High
Low
Exit
Route
Sale
Harvest Sale
Distress Sale
Liquidation
Liquidation
Distress Liquidation
Source: Wennberg, 2010
The entrepreneur should have an exit strategy and the quality of exit is
important. The entrepreneurial exit is a liquidity event and not a failure event.
They refer startup as their baby and exhibit psychological attachment to the
startup they have created. Entrepreneurial exit can happen by relinquishing the
responsibility, refraining from decision-making and can have an impact on the
firm, industry, economy (DeTienne, 2010) and the summary of it can be found
in Table 3.
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Table 3 Entrepreneurial exit summary
Source: DeTienne, 2010; summary by author
5. Research Gap
A few key research gaps have been identified based on a review of the
literature. We understand that there is no focused work on exploring successful
and failed startups. There is no major literary work delving into the cause of
failure and the lessons learned from failed startups. The mode of exit followed
by entrepreneurs has not been studied in detail. While these gaps are largely
true in the global context, we found that there has not been any significant
work done in the Indian context covering these issues. To be specific, the issue
of failure has not been comprehensively explored and analyzed in general and
in the Indian context in particular. The present study has been undertaken
against this backdrop.
III. Objectives, Scope and Methodology
1. Objectives
To address some of the identified research gaps, we have formulated the
following research objectives.
How do failed startups get differentiated from successful startups and
what are the key lessons learned from startup failures?
What is the mode of exit followed by a failed startup founder for
winding up the firm?
Stages
Emergence
Survival and Stability
Growth
Exit Strategy
Interested in
Growth and Profit
Funded - Pressure from
VC Non-Funded -
Allows Focus
Instituting formalized
structure
Reason for
Exit
Alternative
Opportunity
Alternative - Less
resource and less
commitment
Less Control over
decision
Willingly departed
Had been replaced
Options for
Exit
Abandonment of
idea and Voluntary
disbanding
Voluntary disbanding
Private Equity
Bought Out
Initial Public Offering
Liquidate
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2. Scope
The study is confined to tech startups in Bangalore, the highest ranked start-
up ecosystem in India, globally (Startup Genome report, 2017). It is to be
noted that the presence of vibrant and migrant talent was one of the key factors
contributed to the Silicon Valley ecosystem success (Cotteril, 2012) and it is
important to note that Bangalore has the similar feature of vibrant and migrant
talent as that of Silicon Valley. It is considered one of the global startup
capitals in the world (Anjum, 2014). To carry out the study, we have adopted
the case study method and, accordingly, we interviewed four tech startup co-
founders, two successful startups and two failed ones. Of the four, two
represents the B2B sector whereas the other two falls under the B2C segment.
The way a startup deploys factors vary from B2B and B2C and hence we drew
samples. The startup co-founders were identified with the help of NASSCOM
(National Association of Software and Services Companies), an industry
association, (all the four were NASSCOM members), which has a fairly
detailed registry of tech startups operating in India. The samples are drawn
from the same technology sector (two each belonging to B2B and B2C,
respectively) from Bangalore ecosystem and therefore we assume that all four
are exposed to the same degree of risks for their emergence and operations.
3. Methodology
The case study methodology adopted for the study requires elaboration.
“Case study research, through reports of past studies, allows the exploration
and understanding of complex issues. It can be considered a robust research
method particularly when a holistic, in-depth investigation is required.
Although case study methods remain a controversial approach to data
collection, they are widely recognized in many social science studies
especially when in-depth explanations of a social behavior are sought after”
(Zainal, 2007, p.1). Case study methodology will enable us to collect the
information from a single unit, which is relevant to the problem area and will
help us in formulating our proposition or hypothesis (Krishnaswamy et al,
2010).
We developed a case study protocol and approached each startup founder for
an in-depth personal interview. The interview structure of personal profile,
startup profile, the reason for startup and execution, lessons learned and exit
strategy are outlined to the interviewee at the outset, to enable them to
understand the context. The author met the interviewees (co-founders) in
person and recorded their responses and the data were collected over a period
of one week (23-30 June, 2017). The data were recorded in a spreadsheet,
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codified and stored for doing the analysis. At some points in time, explorative
open-ended questions were used to understand the situations better. As
cautioned by Cotteril (2012), based on his observation in the context of Silicon
Valley, co-founders of failed startups might have experienced traumatic
experience, and therefore it would call for careful handling of the situation
while collecting the qualitative information. With this understanding of the
sensitivity, utmost care was taken while interacting with the co-founders of
failed startups while eliciting their experiences. Identities of the co-founders
were codified so that the personal and confidential data are not revealed and
sensitive information was handled appropriately.
In identifying the personality profile of the entrepreneur, the web link
https://www.16personalities.com/ containing the test for MBTI (Myers-Briggs
Personality Type Indicator) was used. The MBTI link was sent across to them
asking them to take the personality type test and the responses were elicited.
This will open avenues for us to understand the MBTI personality profile of
the entrepreneur who has failed and the one who has succeeded. An attempt
will be made to close the loop in creating more successful entrepreneur and
prevent failure in providing direction to the aspiring entrepreneurs by
understanding their current MBTI profile.
IV. Case Descriptions
At the outset, it is appropriate to describe the four case studies as observed,
and based on information gathered. Accordingly, a failed startup and a
successful startup case have been described under the B2C sector followed by
the B2B sector, in this section.
1. Case 1: Failed Startup in B2C Sector
Mr. K chartered accountant by profession and technocrat by heart, has
attempted to bridge the gap in eLearning space with his platform-based
solution. The serial entrepreneur at the age of 43, with 20+ years of industrial
experience and the expertise of founding three startups earlier, has embarked
on the new journey with two more partners who are technically savvy.
1.1 Product
The startup chose to work on the emerging technology, Platform as a Service
(PaaS), and planned for a grand product. It took 30 months for the startup to
build the product resulting in additional cost leading to the realization that
“Plan for MVP (minimum viable product) with product roadmap and do not
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plan for a grand product”. The delay in product delivery was attributed to two
factors. First, when the flash player moved to open source, Android and iPhone
withdrew support forcing the startup to modify the product roadmap
completely. Second, government policy to sue the platform provider and not
the person who uploaded the content in the platform had introduced legal
hurdles.
1.2 Finance
Getting funds was not a constraint and six friends who invested at the early
stage with no formal agreements supplemented partners’ fund. They could not
get new investors as funds required were diminishing to keep the startup
operating. When the return on investment was getting delayed, a few non-
technical investors who could not understand the delay asked for the return of
their investments from the anticipated revenue. But the long gestation period of
the product did not result in any revenue generation and as a result, the
founders were not able to return the investments made by their friends. This
put psychological pressure on the founders to generate revenue for returning
the investments, which they could not.
1.3 Market
With more and more open source platform coming up, time to market was
the key and the platform model was early to the market leading to the
realization of “Content is the king and invest on content than Platform”. Mr. K
voluntarily disbanded the startup and settled the dues for six investors. He
returned to industry, leading India operations for a corporate. He asserts that
this learning effort is a stepping stone for the next launch and the lessons
learned are articulated as follows: “Plan your MVP (minimum viable product)
with product roadmap, if you want to be the leader and realize revenue in the
early stage. Smaller players should refrain from providing a platform. Choose
your partner who is international and if they are non-technical, spend the time
to educate them and enter into formal agreements”.
2. Case 2: Successful Startup in B2C Sector
Mr. R who did his Bachelor of Engineering and Masters in Business
Administration could not resist the desire to be on his own and had the
aspiration to be financially independent. At the age of 27 with close to three
years of industrial experience, he had the right blend of technical and business
skills. He had a dream for the startup and partnered with his friend who is a
pure technologist. They initiated the startup and offered multiple courses for
about five years before embarking on his platform-based solution. The success
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of the platform has resulted in him exploring multiple startups and helped him
to be an entrepreneur with a portfolio of investments.
2.1 Product
Platform as a Service (PaaS) was an emerging technology and this startup
came up with MVP (minimum viable product) in about 4 months. The team
had a blend of technical and business skills required in executing the business
plan leading to revenue realization in about six months. The product features
were enhanced subsequently with the product roadmap, iterative mode of
product development with the sprint plans and it was executed successfully.
2.2 Finance
The funding requirement of the startup was supported by the parent-training
arm, which provided it a steady flow of funds. Revenue influx from the
product, which was sold in the first six months, has augmented the fund
availability. Though funding was available from angel investors, the startup
had not chosen that path and avoided the pressure on returns and volume
growth driven by them. The apprehension of product roadmap diversion was
handled by avoiding the external source of funds, despite the evaluation by a
few VC groups. He confirms this by saying, “we did not have any external
investor and we are fully boot-strapped. It had helped us to scale the product,
eliminating unsolicited external interferences”.
2.3 Market
Growth was fueled by ads on social media. College students having access to
the required courses helped them to catch the target market with ease. The
target audience was given specific attention by segmenting them and providing
them with the appropriate courses on what they needed and when they needed.
It all started with hobby courses, followed by competitive test preparation,
which helped them generating revenue. Mr. R has the aspiration to grow the
firm and has identified a few more product segments fueling it. In his own
words “staying away from investors has helped me to focus on the product and
no pressure on acquiring users”. From the exit strategy perspective, he is ready
to explore options in the merger & acquisition from a large firm, if they are
attractive.
3. Case 3: Failed Startup in B2B Sector
Mr. A did his Bachelor of Engineering in India and Masters in Computer
Science from the Florida Institute of Technology, USA. At the age of 47, with
21+ years of industrial experience, he started a B2B startup focusing on
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“Reducing the interview process time”, along with a tech savvy partner.
3.1 Product
The uniqueness of the proposed product is that it reduced the interview
process time taken by company HR recruiters, as follows. The product enabled
HR recruiters to provide a pre-set questionnaire for prospective candidates for
recording and uploading their video-based responses. This enabled the HR
recruiters to review and shortlist the candidates for the next round of selection
process. The whole process resulted in reducing the number of walk-ins of
candidates to the office thereby saving the time of HR recruiters and improving
their productivity.
The idea was successful with the buy-in from the management perspective.
However, HR recruiters did not drive adoption, as they wanted to meet the
candidate in person to assess the personality of the candidate, to understand
and ensure candidate’s stability. The product suffered on one more count as the
prospective candidates for mid-level positions did not have laptops and the
camera required for recording the video when the product was initially
introduced to the market (between 2012 and 2014).
3.2 Finance
Mr. A and his partner have invested their total accumulated savings in the
development of the product. Investors were not forthcoming as they were
looking for revenue and the POC (proof of concept) was not licensed nor did it
result in earnings. The POC run with a few corporates was taking a longer
period and it did not result in revenue realization.
3.3 Market
The partners had good connects with corporates and could drive the POC.
However, the non-adoption by HR recruiters, as stated earlier, had an impact
on the market development. Mr. A and his partner voluntarily disbanded the
startup and the partners incurred losses at the individual level. He returned to
the industry, leading a function at a corporate. He has placed the entire team of
his startup employees. He is open to further exploration after a few years and
has the following lessons to offer: “Funding availability must be exploited at
the early stage of product development, do very quick POC and do not worry
about dilution. For exploring favorable ecosystem stickiness is required”.
4. Case 4: Successful Startup in B2B Sector
Mr. S was enthusiastic and confident with the expertise he gained from his
previous industrial experience of three years and established a product
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engineering services startup at the age of 27. Being a die-hard technocrat, he
initiated his startup along with his partner and focused on the product
engineering services for about five years before he went on to establish the
B2B product.
4.1 Product
The B2B product offered “integration of Service desk, Asset Management
and Monitoring in a single offering”. It was unique as it eliminated the need to
have multiple products’ integration at a cheaper price. The MVP (minimum
viable product) was built in six months and was ready for market with an
impressive product roadmap. The product is catering to the needs of
manufacturing, BFSI, pharma, retail, healthcare & ITES and can cater to all the
verticals.
4.2 Finance
The product commercial license was sold in six months and the second
license was sold within the 12 months of product development. Funding was
adequate to carry out the subsequent operations and he was exploring VC
support for funding his product enhancement. When VCs looked at cash
availability for one month, they looked at it more as a survival fund than a
product enhancement fund. Funding was dearer, with VCs looking for more
and more revenue, excitement was coming down to use external funding. His
lack of success in mobilizing external source of funding forced him to look at
other options. The CGS (Credit Guarantee Scheme) for SMEs (Small and
Medium Enterprises) by the government of India offered OD (Over Draft)
facility up to Rs.10 million, which came in handy to him. He has leveraged the
government policy in making sure that the fund is available for product
enhancement and it is available at better terms than what an entrepreneur can
expect from VC. This helped him to keep the investors away and allowed him
to remain focused on the robust product roadmap, which was executed
successfully.
4.3 Market
Market availability and acceptance of the product was generating the
required revenue. The reference from the existing clientele was boosting the
revenue significantly and customer satisfaction was driven by “customer WoW”
focus. Mr. S was focused and reiterated the guiding force he adopted: “revenue
focus, pay the salary & sustain growth”. Services business was viewed as a
baggage by the investors while it was the feeder in delivering the product
roadmap. He is not ready to exit but open to form alliances with other firms.
He stated: “we will listen, understand the offer and analyze how it will help our
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growth. Currently, we are not ready to sell but ready to collaborate if it helps
our growth”.
Having described the four cases, we will proceed to analyze the cases in our
next section with reference to our research objectives stated in Section III.
V. Analysis and Inferences from the Case Studies
The description of the four cases enabled us to examine and analyze the first
research objective of differentiating successful startups from failed startups in
terms of the similarities and differences. This is followed by deriving some key
lessons out of startup failures. Finally, we analyzed the second research
objective by throwing light on the modes of exit adopted by the failed startup
co-founders to differentiate them from the successful ones.
1. Factors Differentiating Failed from Successful
We will first understand the common factors across all the co-founders. We
will identify the factors that differentiate the failed startups from the successful
ones. We will draw key lessons learned from startup failures.
2. Common Factors Across All the Co-Founders/Entrepreneurs
We will understand the similarities between the four tech startups and what
characteristics propel them to initiate the startups. To explore the factors, we
have examined startup characteristics under six different classifications,
namely, personality (entrepreneurship specific features), product
characteristics, revenue characteristics, human resource characteristics, market
penetration and access to the ecosystem.
2.1 Personal Characteristics of Entrepreneurs
All the co-founders had the good pedigree with a minimum of one
professional degree. They had the inclination for developing a technology-
based product and attempted to provide a solution to an existing business
problem, through their technovation. They had varying industrial domain
expertise and had acquired the required skills before setting up their startup.
The awareness of risk was high amongst all the entrepreneurs turned co-
founders as none of them had any family business background limiting them.
The vibrant entrepreneurs exhibited the passion to be financially independent
and their burning need to get a distinct identity based on what they are doing.
From the MBTI test results, we could infer that they are all extroverts and
Asian Journal of Innovation and Policy (2018) 7.1:079-102
93
are supported by the characteristic of initiating, expressing their thoughts,
being active and enthusiastic about what they are doing and draw their source
of energy by being with people. From the decision-making component of
personality type, they are all feelers and characterized by being empathetic,
compassionate, accommodating, accepting and tender. All of them have
chosen the partnership route to startup creation. A similar phenomenon of a
partnership route to startup creation and ecosystem success was observed at
Silicon Valley by Basu (2015).
2.2 Product Characteristics
All the entrepreneurs had started on a small scale with the product idea and
most of them had gone with the MVP (minimum viable product) route and the
domain expertise gained through their earlier job experience helped them to
stay ahead of the product curve.
2.3 Finance Characteristics
All the entrepreneurs had multiple engagement sessions with the potential
investors and have attempted to raise funds for product development or
enhancement with a product roadmap.
2.4 Human Resource Characteristics
The staffing pattern confirmed that all are tech startups as technical staff
strength in each of the four startups varied from 83% to 100% of the
employees and the salary cost of staff as a percentage of total expenses varied
between 53% and 90%. Attrition was not seen as a major concern as the key
resources required for product or service delivery was in order and did not
cause any disruption.
2.5 Market Penetration
Those who worked on B2C startups had good social connect through media
compared to B2B entrepreneurs who were neither requiring nor seeking to gain
a mass connect. Those who worked on B2B startups had influential connects at
the senior level in the corporate sector and it had given them the product reach
at the boardrooms. A similar phenomenon of social capital through network
and partnership helping in unleashing the potential for product or services was
observed in Silicon Valley by Basu (2015).
2.6 Ecosystem
All four entrepreneurs are non-natives of Karnataka and migrants to
Bangalore (State capital of Karnataka) from other states and therefore did not
have either schooling or college education in Bangalore earlier. The four
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94
migrant technopreneurs’ choice of Bangalore for their startup was due to the
availability of human resources, and because its vibrant ecosystem had the
required elements to validate the POC (proof of concept), consume the output
and support the scaling up of operations. It is important to note that vibrant and
migrant Indian origin technopreneurs have contributed immensely to the
success of startup ecosystem of Silicon Valley (Cotteril, 2012).
All the above facts prove the existence of a solid ecosystem availability for
startup nurturing at Bangalore and that is why entrepreneurs thronged to it.
Given this understanding, it is appropriate to examine the factors that
differentiate failed start-ups from the successful ones.
3. Differences Between Failed Startups and Successful Startups
Given the similarities between the four tech startups, it is essential to
examine what had caused the failure of two of the four startups and what led to
the success of the other two. To explore the factors, we have examined startup
characteristics under five different classifications, namely, personality
(entrepreneurship specific features), product characteristics, finance
characteristics, market penetration and access to the ecosystem. These are
presented in Table 4.
3.1 Personal Characteristics of Entrepreneurs
The average years of experience and age of successful startup entrepreneurs
are significantly lower than that of the failed entrepreneurs. The reason for
setting up the startup as stated by failed startup co-founders was “great product
idea”, and they went on building the strength of the product features. The
partners were tech savvy and were focused on the technological solution. The
reason for setting up startups as stated by successful startup co-founders was
“financial independence”. The young technopreneurs created a formidable
team with appropriate complementary skillsets and had the burning desire to
succeed.
The MBTI profile of failed startup co-founders belonged to ENFP/J and N
corresponding to “intuitive decision making” characterized by being logical,
reasonable, questioning, critical and tough. The successful startup co-founders
belonged to ESFJ and F corresponding to “feeling decision making”,
characterized by being empathetic, compassionate, accommodating, accepting
and tender. The balance seems to be tilted towards the feeling-side rather than
the intuition-side for being successful and marks the fine difference in the
characteristics of the entrepreneur.
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95
Table 4 Differences between failed startup and successful startup
Group
Result
Failed Startups
Successful Startups
Stage
Emer
-gence
Emer
-gence
Success &
Growth
Success &
Growth
Business Type
B2C
B2B
B2C
B2B
Personal
Years of Experience
20
21
3
4
Age at Inception
43
47
27
27
Reason for startup
Great
product
idea
Great
product
idea
Financial
independe
nce
Financial
independe
nce
Partners Skill
leading to
formidable team
No
No
Yes
Yes
MBTI profile
ENFP
ENFJ
ESFJ
ESFJ
Product
Type of Service
Platform
Product
Platform
Product
MVP Planned
No
Yes
Yes
Yes
Roadmap
Grand
Product
Roadmap
Roadmap
Roadmap
Time for product
development in
months
30
3
4
6
Finance
Time to Realize
Revenue in months
from MVP
No
No
6
6
Source of Funds
Savings,
Friends and
Relatives
Savings
Savings
and
Reinvestme
nt
Savings
and
Reinvestme
nt
Investor availed
Revenue
Required
Revenue
Required
Investor
Avoided
Investor
Avoided
Revenue Realization
No
No
Yes
Yes
Market
Market Growth
No
No
68
countries
3 countries
Eco
-system
Government policy
leverage
No
No
No
Yes
Mentorship availed
No
No
Yes
Yes
3.2 Product Characteristics
One of the failed startup entrepreneurs had taken 30 months to build the
product and he had planned for a grand product, which had resulted in cash
burnout situation. They did not have any revenue realized in the initial stages
of operations, unlike the successful ones. The other failed startup entrepreneur
though had built the MVP in three months, he had not licensed the product and
had to extend the free usage period several times to keep the product usage on-
going. The poor product adoption did not result in revenue realization either.
Asian Journal of Innovation and Policy (2018) 7.1:079-102
96
The product focus helped the successful entrepreneur to build the MVP
(minimum viable product) in a short duration of 4 to 6 months irrespective of
B2B or B2C solution.
3.3 Finance Characteristics
Another factor that distinguishes the failed startups from the successful
startups was the ability to monetize the idea through revenue realization. As a
result, the successful entrepreneurs could realize revenue in the first six months
from the time of MVP. They judiciously kept on reinvesting the proceeds on
product feature enhancement and stayed away from the investors. The
diffusion of information about the startup through word of mouth from the
customers and the references they provided helped the entrepreneurs to sell
more licenses and fuel growth. The failed startups suffered the major
bottleneck on revenue realization as they could not monetize the idea, and
either the MVP usage was extended several times or grand product approach
followed which did not result in any revenue.
Startups were looking for investor funds and the investors wanted the
business plan to result in revenue generation and growth, but the failure to
raise revenue early made the investors elude them completely. Successful
startups focused on product roadmap with their self-generated funds as they
have established revenue stream and were adequately guided by their mentors.
Failed startups struggled to generate revenue and their product roadmap
suffered as they could not generate external funds as well, and they lacked
guidance from the mentors.
3.4 Market Penetration
The successful entrepreneurs could extend their product footprints nationally
and internationally, which gave them the stage for success and growth. The
failed entrepreneurs could not grow the product and suffer on the product
launch and product adoption issues, which resulted in them stagnating at the
emergence stage itself. As a result, while the successful ones could penetrate
the market gradually and steadily, the failed ones just could not capture the
entry market itself.
3.5 Ecosystem
The successful startup entrepreneurs leveraged the ecosystem support
mechanism as well as mentorship. The ability to sound the idea and discuss the
concepts and execution plan helped them to be aware of the potential pitfalls
and led them to success. The failed startup entrepreneurs did not avail the
mentorship as they had the significant industrial expertise to their credit and
felt they were self-capable to implement their ideas and take them to the
market.
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97
4. Mode of Exit of Failed Startup Founders
The failed startup founders, unlike the successful startup founders, do not
have multiple exit options. The failed startup founders have to wind up their
venture operations, and they need to manage a few emotionally painful events.
It is the recognition of the imminent failure of startups that would force the
founders to exit. It is appropriate to ascertain the mode of exit adopted by each
of them. More precisely, it is interesting to examine how the mode of exit did
impact the founders and those associated with the failed startup. The multiple
challenges to be handled by failed startup entrepreneurs and their actions as
understood from the case studies are listed in Table 5.
Table 5 Exit experience of failed startup founders
Parameter
Failed Startup
Stage
Emergence
Options for Exit
Voluntary disbanding
Family
Securing family and handling the emotions
Human Resources
Alternative placements
Product
Product not licensed and no support components required
Market
Dent in the brand building effort
Investors
Settling investors fund
Revenue
Requires license cost amortization schedule and returning to
customer when revenue was recognized
Admin and
legal compliance
Legal and regulatory compliance in documenting the closure
Entrepreneur
Returned to corporates
The failed startup founders have acquired deep domain knowledge with 20+
years of expertise and had their focus more on their technical domain area.
When the MVP was taking longer time and revenue was not forthcoming, they
realized that they are not making money. Once they realized that they are not
making money, they were quick enough to understand the direction of startup
and were bold enough to call it off rather than prolonging it and therefore
voluntarily disbanded the startup. They were emotionally strong and prepared
their family and secured them fully and the family support structure was
instrumental in overcoming this adversity. They stood firm in ensuring proper
alternative placement of human resources who worked for them and exhibited
high ethics by settling the investments made by their friends and relatives once
in for all. They have returned to the industry and joined the corporate sector at
senior level positions, thereby contributing to the ecosystem with their
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98
expertise. It is important to note that they continued to have the burning desire
to return whenever the right opportunity would knock at their door.
The successful startup founders revealed that they are ready to explore exit
opportunities (through merger & acquisition) if they are attractive and are not
willing to deny it blindly, and it exhibits their energy, enthusiasm and agility.
The successful startup entrepreneurs need not have to undergo the complex
challenges as experienced by the failed startup entrepreneurs.
5. Inferences and Key Lessons
The discussion and analysis of the four cases on similarities and
dissimilarities between successful startups and failed startups have enabled us
to derive some inferences and key lessons, which are as follows:
The time to create the MVP should be minimal and it should be tested to
ascertain the market fit early by avoiding grand product approach.
Having ascertained the market fit, revenue realization must be done at
the earliest. Doing free POC (proof of concept) at the early stage of the
product should not be prolonged and the product must earn its revenue in
every transaction to be viable.
Partners should have the complementary skillset, i.e. concentrated
partner skillset will be a major source of disadvantage. It must be a
heterogeneous skill mix to propel the startup ahead.
Startup creation at an early age with required domain expertise may help
in a successful startup as the desire to have financial independence
pushes the entrepreneur to perform at a higher level.
The desire to be financially independent at a higher level with ESFJ
personality type characterizes the successful entrepreneurs.
Mentorship plays a decisive role in early startup nurturing.
Successful co-founders continue to have their ideas and actions reviewed
and validated by their mentors, which has helped them to be more
prudent in taking the decisions whereas the failed ones kept themselves
away from mentorship.
VI. Summary and Conclusions
It is appropriate to examine how do startups fail and this problem has been
explored in the context of Bangalore, India, by means of case study
methodology. The examinations of startup failure through these case studies
offer valuable insights. In this paper, an attempt has been made to decode the
success or failure of the startup with a systematic study using the lenses of
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99
entrepreneurial and firm specific factors. Four case studies (across B2B and
B2C - one success and one failure each) have been conducted as part of this
papers on startups that operated/are operating in Bangalore.
To begin with, we analyzed the similarities that exist among the subjects
from the perspective of entrepreneurial and firm specific factors. It was
observed that all founders had a minimum of one professional degree and had
the passion for the technology-based product and service development. They
had the burning desire to succeed and formed partnerships as they embarked
on the startup effort. All the startups had high technical staff strength, their
salary cost was higher and attritions were not impacting them. B2B founders
had key connects at the corporate boardrooms while B2C founders had high
social connects. One significant observation was that all the co-founders are
migrants to Bangalore.
Later, we identified the differences between failed startups and successful
startups. The determinants for a successful startup journey from these case
studies are summarized here. Establishing the startup at an early age with
required domain expertise, and the financial stability of the founders seem to
help the entrepreneur to succeed. The second factor that was observed in
common across the successful founders was that they focused on ascertaining
the market fit of their offering early by avoiding grand product approach.
These founders delivered a MVP (minimum viable product) in less than six
months and after initial customer validation, embarked on executing a strong
product roadmap. They realized revenue in less than six months from the time
MVP was ready and formed partnerships with people who had the
complementary skill set. Further, they sought regular and periodic mentoring
from the right mentors and had their ideas and actions reviewed and validated.
The MBTI personality type of ESFP appears to be dominant among the
successful entrepreneurs. It is observed that the successful startup
entrepreneurs are not emotionally attached to their startup, and they are ready
to explore the exit options.
In contrast, the exit strategy adopted by failed startup entrepreneurs was
complex and they had to make tough calls following high ethical standards.
They have returned to the ecosystem with their learning curve and have joined
corporates and at the right opportunity, they are willing to reinitiate one more
startup effort. They continue to contribute to the ecosystem and have not exited
from it.
Our study on the cause of failure and the mode of exit by startup founders
will help the prospective entrepreneurs to take enough precautions to avoid
failure. The reduction in failure rate will minimize the cost of failure and it can
benefit the ecosystem. In particular, the learning obtained from failed
experiences will enable the ecosystem to minimize the cost of failure, and it
can offer guidance to potential entrepreneurs.
Asian Journal of Innovation and Policy (2018) 7.1:079-102
100
Limitations and Scope for Future Research
The findings are specific to high-tech startups at Bangalore, and the
observations will vary based on sector and the region in which the startup is
operating. The observations are based on the cases and cannot be generalized.
The results must be ascertained based on a larger sample size.
Acknowledgement
An earlier version of this article was presented in the ICSSR, India-JSPS,
Japan Joint Seminar on "Ecosystem for Technology Start-ups in India and
Japan: A Comparative Perspective", held during 1-5 May 2017 at the
Department of Management Studies, Indian Institute of Science, Bangalore
and jointly organized by the Department of Management Studies, Indian
Institute of Science, Bangalore and Toyohashi University of Technology,
Japan. The sponsorship provided by both Indian Council of Social Science
Research (ICSSR), Government of India, New Delhi and Japan Society for
Promotion of Science (JSPS), Government of Japan, Tokyo for the joint
seminar is gratefully acknowledged. However, the author alone is responsible
for any of the deficiencies if remain in the article and not the sponsors of the
joint seminar.
The author is grateful for the comments and suggestions of anonymous
reviewer/s, which has greatly helped him in the revision of the article.
However, the author alone is responsible for errors, if remain in the paper.
Asian Journal of Innovation and Policy (2018) 7.1:079-102
101
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... Software startups are characterized by various challenges, highly uncertain conditions, lack of resources, and operating in rapidly growing markets (Paternoster et al., 2014). Similar to AM, software startups aim for rapid product delivery to their customers (Kalyanasundaram, 2018). Therefore, AM holds value in providing startups with improved software development practices . ...
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