Management conundrum of IT STARTUPS

The reasons why a typical Indian IT startup stagnates over the years—despite its survival in turbulent markets—or rather fails to leap to the next orbit? Entrepreneurs must realise the management conundrum they might be facing and could be blissfully unaware of— hampering the growth prospects. It should encourage them to reflect on the points relevant for their own startup, facilitate questioning of the status quo, prioritise actions and thereby enable leaping to the next orbit

Albeit forced by the situation, the landmark budget presented by the then finance minister Manmohan Singh in 1991 ushered a new dawn in Indian economy. ‘Liberalisation and globalisation’ was the magic mantra of the reforms. One particular industry which was in nascent stage at that time got benefitted most and it was Information Technology industry. It won’t be an exaggeration to say Narayana Murthy, Shiv Nadar, Azim Premji, FC Kohli and Narendra Patni, were the founding fathers of Indian IT Industry.

Information Technology got one more boost thanks to the Y2K bug and then it never looked back. The subsequent years provided employment to millions of youngsters; lakhs of them made a leap to upper middle-class, stock options saw thousands of them becoming crorepatis. More importantly, it spawned a new wave of entrepreneurs.

India's IT-BPM industry (excluding e-commerce) was expected to reach at USD 254 billion, including exports of around USD 200 billion in FY2023-24. The Department for Promotion of Industry and Internal Trade (DPIIT) has recognised over 77,000 startups across 656 districts in India. In terms of headcount, the Indian tech SME sector is estimated to have closed FY23 with 7,40,000 employees.

Everyone loves an Indian startup success story. Not too many know that 2,404 failed in 2023. While India boasts 115 unicorn startups, only 17 of them are profitable – that’s hardly 15 per cent. The rest are just sucking up resources, drawing in billions of dollars in funding from venture capitalists and investment firms around the world. Around 91% of startups fail within first five years and the most common reason being lack of innovation.

While almost all of the entrepreneurs might be aspiring to be unicorns, hardly 2% to 3% of them could be realising that dream. A bulk of the startups (may be, almost 80%) would be having the employee count between 10 to 50 and turnover could be between one to eight crore rupees.

Even after surviving for 7-8 years, a typical startup (small enterprise) doesn’t grow to be a medium-sized enterprise. There could be many reasons why it stagnates over the years or rather fails to leap to the next orbit. A salient few reasons are described below:

1. One-customer dependence: Most of such companies rely heavily on handful customers, with one or two constituting almost 80% of the revenue. Knowing this fact, customers start arm-twisting in the billing rates in every contract renewal. So, while the start-ups need to provide increased salary to their employees year on year, billing rates don’t increase in that proportion. In fact, they come down in many cases impacting the bottom line adversely.

2. Absence of second-level management:

Right from the inception, the founder director is well aware of the fact that s/he needs to wear multiple hats, at least four of them at one point — sales head, delivery head, practice/competency head and HR head. Acquiring new customer happens mostly through founder’s contacts. While this is okay in the initial days (or even a year or two), the founder needs to consciously develop the second-tier management, to start with business development managers (BDMs) and project managers, who should also be hands-on in the designated skills. Absence of this second layer puts heavy pressure, time constraints on the founder/s. If you cannot hire second- tier leadership (mainly due to your financial constraints), you need to groom the youngsters for the positions of project manager, BDM, HR lead etc. More importantly, you need to instil the sense of responsibility and accountability over months of hand holding. Caution – don’t give them phony/big titles.

3. Dead-parrot syndrome: While it could be a universal tricky situation of who will bell the cat—take the risk of becoming a bad messenger and share the unpleasant truth with the top boss—this phenomenon is more pronounced in SME segment compared to large organisations run by professional management. So, the team refrains from noticing the elephant in the room, communicates everything which owner/founder likes to hear but the obvious, like say, the product is no more relevant in the market; the parrot is dead and not meditating. And, the founder with his own set of worries, fights almost on 24x7 basis — cash flow being on top of it, has no time to reflect, to introspect, to brainstorm, to set feedback mechanism etc.

To avoid this kind of unpleasant scenario, following measures could be adapted –

• Drop-box feedback/suggestions by team— it could be anonymous to ensure wider participation by the team.
• Hire seasoned management professionals as a freelancer for a week or two and get their feedback about the company, operations, team etc
• Do some relevant and credible course in management or some specific IT topic. More than anything else, it frees up your mind for fresh thinking.
• Get feedback from close friends and fellow-entrepreneurs, who are not afraid of calling a spade a spade.

"While India boasts 115 unicorn startups, only 17 of them are profitable – that’s hardly 15 per cent. Around 91% of startups fail within first five years and the most common reason being lack of innovation"

4. Loving product/technology more than the customer: Many startups come up with products and solutions targeted at micro-niche, ultra-thin market segments. Many a times the founder or directors are so much sold on their own novel concept, product or technology, that they overlook the important parameter of market size or of customer’s actual requirements and expectations. When you’re targeting such a micro-niche, what would be your growth prospects? And, what if that micro-niche somehow vanishes thanks to some other technology, you didn’t imagine would surface some day? And, when you have invested so much resources over the years in it, you kind of get trapped in that daily grind and fail to notice the cues or the writing on the wall. So go back to basics, re-validate your go-to-market plan, reassess your service offerings, solution, product, in terms of 5 P’s of marketing.

5. Lack of innovation culture: While the very reason your startup would be in the existence could be due to some innovative solution you would have thought of, but subsequently, have you consciously fostered the innovation culture in your team? Due to the highly dynamic nature of IT industry, innovative products and tools get launched almost on a daily basis. You and your team need to be agile enough to explore the relevant tools and trends (e.g. Generative AI), and take proactive steps for your business operations ensuring you are ahead of the curve. If this is not happening, it could be hampering your growth prospects over the years.

6. Complacency: In many cases, only after toiling for years (at least 3-4 years), startups reach the break-even point, cash-flow becomes more predictable, the business gets some stability, but soon that becomes the comfort zone and the risk appetite of founders reduces drastically.

7. Business Continuity Planning(BCP): Very few founders enjoy the luxury of week-long annual vacation. This fact itself demonstrates the one-man-show of the company. Keep aside vacation, but founders can’t afford to fall sick even for a couple of days. So, while BCP expects you to take care of how the business should go uninterrupted in the wake of a disaster (natural or man-made), founder needs to at least ensure that the business operations would continue seamlessly in case s/he is not reachable for a day or two due to personal or health reasons. The existence of a sound second-tier management is of paramount importance in such cases.

8. Dilution of equity and on-boarding of new partner/s: This is a tricky trade-off but a necessary one, if you want to expand your business operations in lesser time, and so need lot of funds. Here, the key thing would be the chemistry between the current directors and the new ones.

9. Succession planning: Founders need to plan very much for succession planning. If you have toiled for years, rather decades, and only now you’re reaping the results, you need to plan for the legacy; induct family member or even a professional manager in rare cases early enough and groom him/her for the top role under your tutelage.

While I’m fully aware that there is no one-size fits-for-all and there have to be horses-for-courses, above mentioned points should nevertheless make entrepreneurs realise the management conundrum they might be facing and could be blissfully unaware of—hampering the growth prospects. It should encourage them to reflect on the points relevant for their own startup, facilitate questioning of the status quo, prioritise actions and thereby enable leaping to the next orbit.