The Funding Struggle: Understanding the Financial Barriers for Indian Startups

The Funding Struggle: Understanding the Financial Barriers for Indian Startups

Everyone desires to make their mark in the world. Desires to stray from the path of the masses and make a name for themselves in the world. One prominent means of doing this is to be a well-known Entrepreneur whose name resonates across the world. Youngblood is full of desires. Youths in India in particular want to break away from the established norms. But being an entrepreneur is easier said than done. Given the societal perception of failure and the difficulty of securing money from the banks, it also poses systemic difficulties apart from existing inherent difficulties. India is a vast nation in terms of landmass and resource allocation. A lot of financial resources and services are focused in a few parts of the country while the rest of them don’t get access to the same benefits.

Statistically, it is proven that 90% of startups fail within 18 months of their inception.

There are a lot of hurdles a startup founder must face externally before he even secures a single rupee for his business venture. Here are a few of them.

Capital Deficiency

Banks are the main source of investment in a vast nation like ours. They are the first choice for any Indian entrepreneur after exhausting their personal connections. But the banks play by a different rule book. Given the risky nature of startups, banks are hesitant to provide the capital. Systematically they cannot give out lump sum loans without collateral. Though these highly regulated policies have saved the economy from dipping, it acts against the interest of startups.

Venture capitalists in India are very low in number compared to the USA or any economic superpower. As stated in the intro, the ratios of active investors to entrepreneurs are very low in India. And on top of this, these venture capitalists are concentrated in small areas of the country. This poses a tremendous barrier for startups that are not in the vicinity of major metropolitan areas to secure investments.


Given the nature and industry, a startup specializes in, there are various permits/ licenses one must hold. The complex regulations involved in acquiring those is anything but simple. Innumerable permissions and red tape is a killing factors, and given its legal nature, this alone poses to be a drain on your existing capital.

The number of hurdles and offices an investor has to visit just to get permission for trivial things is mind-boggling. This is why the importance of networking is highly stressed.

Support Ecosystem

Make no mistake, the Indian startup scene is a global phenomenon now. But lack of helpful resources like mentorship programs, incubation centres, networking opportunities and access to the expertise of the corresponding industry is very lacking in India. Without all these in the ecosystem, it is like taking a directionless route which is bound for failure most of the time.

We have no facilities like convertible notes or any other investment instruments. The legal system is also behind these.

Anti-Risk Mindset

How often have you heard “Do this and your life will be settled”, India is a country which is rife with poverty. So seeking a stable life is the end goal for many households. Anything which goes against the established formula of stability is highly frowned and discouraged upon. This is seen as a daredevil-like stunt if you do not have a strong economic background.

Indian conservative elders have culturally been against the risks. They desire their children to get a government job or a large MNC or pursue a medical profession or a law profession. Anything which poses a slight amount of risk to job security is scorned. Though they yearn for stability, startup ventures are never guaranteed, any hopes and dreams of making it big are immediately thwarted. It is almost a running joke now. If you aren’t an engineer or a doctor, you are a disappointment.

This same mindset is also held by investors. A lot of investors here are conservative by nature. They only prefer to invest in large-cap companies which have a proven track record.  This risk-averse attitude prevents them from investing in groundbreaking innovative startups.

Even after they somehow manage to secure an investment, they are forced to undersell and reduce their stake to secure their investment from these conservative investors. This leads to the founder losing control of his stake and by definition losing control of his company, this is a demotivating factor which also plays a role in the downfall of a company.

Limited Exit Prospects

Once invested, the number of options an investor has to cash out on his investments is very few, with acquisitions and IPOs being major means. The limited means of liquidating their investments is a huge barrier for investors to invest lump sums in startups they have faith in. The end goal of every investment is to take back more than they invested. If the avenues for this are fewer, there isn’t much reason for an investor to invest in any business.

But one thing for certain is that these things are changing. The government of India in the past decade has implemented policies and is slowly working around the red tape and it has made it easier for startups to take their baby steps.