Why Do Startups Fail? Financial Lessons from Indian Unicorns
- Editor
- Oct 22
- 5 min read
by KarNivesh | 22 October, 2025
India’s startup ecosystem has emerged as one of the most dynamic in the world. With over 118 unicorns and an investment inflow exceeding ₹1.15 lakh crores in 2024, the country has become a magnet for innovation and venture capital. Yet behind this glittering success story lies a sobering truth 90% of Indian startups fail. In 2024 alone, more than 5,000 startups shut down, with Maharashtra (929 closures), Karnataka (644), and Delhi (593) leading the list. The collapse of once-celebrated unicorns like Byju’s, Paytm, and Ola Electric provides crucial financial lessons for entrepreneurs, investors, and policymakers.
The Anatomy of Startup Failures
1. Product-Market Fit: The Most Common Mistake
The single biggest reason startups fail isn’t a lack of funding but a lack of market demand. Studies show that 34% of startup failures are due to poor product-market fit. Many Indian founders build products looking for problems instead of solving existing pain points.
Consider TinyOwl, a food delivery app that raised ₹252 crores and expanded to 19 cities before shutting down. The company’s aggressive discounting attracted users temporarily but failed once subsidies stopped, as Indian consumers remained highly price-sensitive. Similarly, Housing.com raised ₹714 crores but couldn’t convert web traffic into actual property sales because it ignored the on-ground challenges of real estate buyers and sellers.
2. Financial Mismanagement: The Silent Killer
While 16% of startup failures are officially attributed to cash flow problems, the broader issue is poor financial discipline. Unrealistic revenue forecasts, uncontrolled spending, and lack of accountability often sink even well-funded firms.
No example illustrates this better than Byju’s. Once valued at ₹18.48 lakh crores, the edtech giant’s valuation has fallen by 95% to around ₹840 crores. Its losses skyrocketed from ₹21 crores in FY2020 to ₹380 crores in FY2021, even as it spent over ₹840 crores acquiring companies like WhiteHat Jr. Lavish marketing campaigns, including deals with Lionel Messi and Team India, further drained resources. When revenues slumped post-pandemic, Byju’s faced mounting debt and leadership turmoil, culminating in a valuation collapse and loan defaults.
3. Team Dynamics and Leadership Crises
Around 18% of failures stem from leadership conflicts and human resource problems. Startups, by nature, operate in high-pressure environments that test founder relationships and management cohesion.
Housing.com imploded due to internal clashes between founders and investors, while Hike Messenger, despite once boasting 100 million users, shut down in 2021 after repeated strategic pivots demotivated its workforce. Byju’s also suffered leadership instability when key executives, auditors, and board members resigned in 2023, signaling a governance breakdown.
Spectacular Falls: Case Studies
Byju’s: From Unicorn to Cautionary Tale
Byju’s meteoric rise from a ₹420-crore startup in 2015 to a ₹18.48-lakh-crore giant showcased India’s startup potential - and its pitfalls. Aggressive expansion, poor integration of acquisitions like Aakash and WhiteHat Jr, and predatory sales practices led to a reputational and financial meltdown. By 2023, founder Byju Raveendran reportedly mortgaged personal assets to pay salaries, as the company defaulted on a ₹10,000-crore loan and faced insolvency proceedings.
Paytm: When the IPO Dream Turned into a Nightmare
Paytm’s ₹1.53-lakh-crore IPO in November 2021 was expected to redefine Indian fintech. Instead, it became one of the country’s worst-performing listings. The stock debuted below its issue price of ₹2,150 and plunged to ₹616 by 2023 - a 71% loss for investors. Analysts blamed overvaluation (47x price-to-sales ratio), unclear business focus, and fierce competition from PhonePe, Google Pay, and BharatPe. Over time, Paytm’s inflated expectations met harsh market realities, eroding investor trust.
Ola Electric: From Hype to Harsh Reality
Ola Electric entered the stock market with much fanfare in August 2024, raising ₹525 crores at ₹76 per share. Within a year, its stock collapsed to ₹39.76 - a 75% decline. The company’s operating revenue halved to ₹828 crores, and its losses ballooned to ₹1,905 crores in FY2025. Market share plunged from 46% to 19%, and customer complaints about product reliability and service grew rampant. The lack of robust after-sales infrastructure crippled what was once India’s EV hope story.
Corporate Governance: The Hidden Weakness
Poor governance has been a recurring theme in India’s startup failures. Unlike listed companies, startups often lack external oversight, allowing founders excessive control over finances and decisions.
BluSmart faced allegations that founders diverted ₹168 crores of investor funds toward personal luxuries.
BharatPe’s co-founder Ashneer Grover was accused of siphoning off ₹74 crores using fake invoices.
Byju’s delayed financial filings by almost a year, prompting resignations from Deloitte and three board members.
Such cases have severely dented investor confidence, leading foreign investors to offload nearly 3 crore Paytm shares since its IPO. In total, governance failures wiped out an estimated ₹4.2 lakh crores in startup market value during 2023–24.
Lessons from Success Stories
While many startups stumbled, others charted sustainable paths. Zerodha, founded by Nithin and Nikhil Kamath, grew into India’s largest brokerage without external funding. Its focus on operational efficiency, technology-driven scaling, and customer satisfaction made it profitable and debt-free, with an estimated valuation of ₹840 crores.
Similarly, Freshworks, founded in Chennai, became India’s first SaaS company listed on NASDAQ in 2021. Its success stemmed from solving genuine customer problems, maintaining financial discipline, and building a global market presence. Both companies demonstrate that profitability and growth can coexist without reckless spending.
Financial Patterns and Entrepreneurial Lessons
Data reveals a troubling pattern - startups that raise large funding rounds early tend to struggle with sustainability. The median funding for Indian startups reached ₹22.7 crores in 2024, but easy capital often masked flawed business models. Around 80% of unicorns remain unprofitable, dependent on investor money for survival.
Entrepreneurs should focus on:
Unit economics before scaling.
Transparent financial reporting from day one.
Independent board oversight to ensure accountability.
Customer-driven innovation rather than market creation.
Zerodha’s bootstrapped discipline, for example, shows that constraint often breeds creativity and resilience.
The Road Ahead: Toward a Sustainable Ecosystem
India’s startup ecosystem must shift from a “growth-at-all-costs” mentality to one emphasizing sustainable growth and good governance. Investors, too, should prioritize management quality and ethical leadership over inflated valuations. Regulators can help by designing startup-specific governance frameworks and early warning systems to detect financial irregularities before crises erupt.
The future of Indian startups depends on celebrating profitability and resilience as much as innovation and valuation. As 29 of India’s 118 unicorns have already proven, sustainable success is not just possible-it’s profitable.
Conclusion
The combined valuation of Indian unicorns, around ₹32.3 lakh crores, represents immense potential. Yet the failures of Byju’s, Paytm, and Ola Electric remind us that without strong financial management, market understanding, and governance, even billion-rupee startups can crumble. The next generation of entrepreneurs must learn from these costly mistakes-build businesses that solve real problems, achieve profitability early, and operate with transparency and ethics.
India’s next wave of successful startups won’t just chase unicorn status-they’ll be sustainable, profitable, and impactful, creating lasting value for both customers and the economy.
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