The Indian startup landscape has witnessed an unprecedented boom over the past decade, with numerous companies reaching the coveted "unicorn" status—startups valued at over $1 billion. While these success stories have captured headlines and attracted massive investments, a troubling trend has emerged beneath the surface. Many once-celebrated unicorns are now facing significant challenges, with some even shutting down operations entirely. This concerning pattern raises important questions about the sustainability of high valuation startups in the Indian context and the fundamental business principles that may have been overlooked in the rush for growth and funding.
{tocify} $title={Table of Contents}The Rise and Fall: Understanding the Unicorn Phenomenon
The unicorn phenomenon in India gained momentum around 2015, with investors pouring billions into promising startups across e-commerce, fintech, edtech, and other sectors. The COVID-19 pandemic further accelerated this trend, with 2021 witnessing the birth of over 40 new unicorns. However, the post-pandemic reality has been sobering. Companies that once commanded sky-high valuations are now struggling with fundamental business challenges, forcing many to downsize operations, lay off employees, or close entirely.
This boom-and-bust cycle reflects deeper issues within the startup ecosystem that deserve careful examination. The pressure to achieve unicorn status often pushes founders to prioritize growth metrics over sustainable business fundamentals, creating a house of cards that eventually collapses when market conditions shift or investor sentiment changes.
Key Factors Behind the Failure of Indian Unicorns
- Unsustainable Business Models and Negative Unit Economics
- Excessive Focus on Valuation Over Value Creation
- Copycat Business Models Without Local Adaptation
- Poor Governance and Operational Inefficiencies
- Over-reliance on Continuous Capital Infusion
- Premature Scaling and Market Expansion
- High Customer Acquisition Costs
- Regulatory Challenges and Compliance Issues
- Lack of Differentiation
- Cash Burn Mentality
- Investor Pressure and Short-Term Thinking
Unsustainable Business Models and Unit Economics
Many Indian unicorns built their growth strategies on deeply discounted products and services to acquire customers rapidly. While this approach successfully drove user acquisition and gross merchandise value (GMV) growth, it created fundamentally unprofitable business models. Companies like Blinkit (formerly Grofers), Snapdeal, and several food delivery platforms have struggled with negative unit economics—losing money on each transaction while hoping to achieve profitability through scale or future monetization strategies that never materialized.
The problem becomes particularly acute when startups operate in low-margin businesses with high operational costs. For instance, many e-commerce and quick commerce companies found themselves trapped in a cycle of burning investor cash to maintain growth without a clear path to profitability. When funding environments tightened, these fundamental weaknesses were exposed, forcing painful restructuring or closure.
Excessive Focus on Valuation Over Value Creation
The pursuit of higher valuations has often overshadowed the importance of building sustainable businesses. Founders and investors alike became caught in a valuation game, where each funding round needed to demonstrate significant markup over the previous one. This created perverse incentives to inflate metrics, enter unprofitable markets, or make questionable strategic decisions to justify ever-increasing valuations.
The pressure to show growth at all costs has led to numerous examples of startups expanding too rapidly into multiple verticals without mastering their core business. Companies like Housing.com, Quikr, and OYO Rooms faced significant challenges after aggressive expansion stretched their operational capabilities and diverted focus from their original value propositions.
Copycat Business Models Without Local Adaptation
Another critical factor has been the tendency to import business models from the US or China without sufficient adaptation to Indian market realities. The unique characteristics of the Indian consumer—price sensitivity, diverse regional preferences, and infrastructure limitations—often render direct replicas of Western business models ineffective.
For example, several e-commerce unicorns attempted to replicate Amazon's playbook without acknowledging India's distinct challenges in logistics, digital payments adoption, and consumer behavior. Similarly, many food delivery, mobility, and fintech startups struggled when they discovered that the unit economics that worked in developed markets were unsustainable in the price-sensitive Indian context.
Governance Issues and Operational Inefficiencies
Poor corporate governance and operational inefficiencies have plagued many Indian unicorns. As companies scaled rapidly, basic business disciplines often took a backseat to growth metrics. Issues like inadequate financial controls, inefficient organizational structures, and lack of experienced management have contributed to the downfall of several high-profile startups.
BharatPe and Zilingo represent cautionary tales where governance failures and alleged financial irregularities severely damaged promising businesses. In other cases, the inability to build robust operational systems to support rapid scaling has led to deteriorating service quality, customer dissatisfaction, and ultimately, business failure.
The Funding Winter: When Reality Catches Up
| Company | Sector | Peak Valuation | Key Issues | Current Status |
|---|---|---|---|---|
| Zilingo | E-commerce | $970M | Governance issues, financial irregularities | Liquidated in 2023 |
| BharatPe | Fintech | $2.8B | Corporate governance failure, leadership crisis | Significant valuation drop, leadership overhaul |
| Byju's | Edtech | $22B | Aggressive expansion, delayed financial reporting, regulatory issues | Severe valuation markdown, layoffs |
| Blinkit (Grofers) | Quick Commerce | $1B | Negative unit economics, unsustainable cash burn | Acquired by Zomato at lower valuation |
| Snapdeal | E-commerce | $6.5B | Failed to differentiate from Amazon/Flipkart, over-expansion | Valuation crashed to under $1B, abandoned IPO plans |
| Shopclues | E-commerce | $1.1B | Poor execution, lost market share to bigger players | Acquired at ~$100M valuation |
| Ola Electric | EV Manufacturing | $5B | Product quality issues, over-promising | Struggling after IPO, significant stock price drop |
| Paytm | Fintech | $16B | Regulatory challenges, profitability concerns | 75%+ drop in stock price post-IPO |
| Vedantu | Edtech | $1B | High customer acquisition costs, post-pandemic demand drop | Multiple layoff rounds, valuation markdown |
| Zomato | Food Delivery | $5.4B | Persistent losses, high operational costs | IPO below peak valuation, stock volatility |
The global economic slowdown and tightening monetary policies in 2022-2023 triggered what industry observers called a "funding winter" for Indian startups. With capital becoming scarce and investors shifting focus from growth to profitability, many unicorns found themselves in crisis. Those that had relied on continuous capital infusion to sustain operations suddenly faced existential threats.
This change in investment climate exposed the fragility of business models built on the assumption of perpetual funding access. Startups that had prioritized vanity metrics like GMV or user acquisition over sustainable unit economics found themselves particularly vulnerable. Companies like Byju's, which had expanded aggressively through acquisitions and marketing spending, faced severe challenges when funding sources dried up.
The funding winter has been particularly harsh for certain sectors. Edtech companies that thrived during pandemic lockdowns saw demand plummet as schools reopened. Similarly, many direct-to-consumer brands that had enjoyed easy venture funding found themselves struggling with fundamental profitability issues when investor sentiment changed.
The Path Forward: Building Sustainable Indian Unicorns
- Identify real-world problems
- Validate the idea with an MVP
- Choose a sustainable business model
- Use cost-effective development strategies
- Leverage India’s digital ecosystem (UPI, ONDC, AI)
- Focus on sustainability & scalability
- Bootstrap before seeking investment
- Build a strong team & culture
- Optimize marketing & customer acquisition
- Comply with legal & financial regulations
Despite these challenges, the Indian startup ecosystem remains vibrant with tremendous potential. The failures of the first generation of unicorns provide valuable lessons for building more sustainable businesses in the future:
Prioritizing Unit Economics from Day One
Successful startups are increasingly focusing on unit economics and path to profitability from early stages. Rather than pursuing growth at all costs, they're building businesses that can generate positive contribution margins on each transaction. Companies like Zerodha and Zoho have demonstrated that profitable growth is possible without massive external funding, providing alternative role models for emerging entrepreneurs.
The emphasis is shifting from "blitzscaling" to "sustainable scaling"—growing at a pace that allows operational excellence and financial discipline. This approach may result in slower growth trajectories but creates businesses with stronger foundations and greater resilience during economic downturns.
Building for India-Specific Challenges and Opportunities
The next generation of successful Indian startups will likely be those that build solutions specifically tailored to Indian market conditions rather than importing foreign business models. This includes addressing unique infrastructure challenges, leveraging India's digitalization trends, and developing pricing models appropriate for Indian consumer segments.
For example, companies like PhonePe and Google Pay have successfully adapted digital payment solutions to India's specific needs, building on the UPI infrastructure. Similarly, startups addressing healthcare, agriculture, and education with India-specific approaches are showing promising sustainability metrics.
Strengthening Governance and Operational Excellence
Investors and founders are increasingly recognizing the importance of strong corporate governance and operational discipline. Many VCs now place greater emphasis on building proper systems, processes, and financial controls from early stages rather than focusing exclusively on growth metrics.
The inclusion of experienced operators and industry veterans on boards and leadership teams is becoming more common, bringing valuable perspective on sustainable business building. This shift represents a maturation of the ecosystem, moving beyond the "move fast and break things" mentality to a more disciplined approach to company building.
Conclusion: A Necessary Correction for Long-Term Success
The current challenges facing Indian unicorns should be viewed not as the failure of the startup ecosystem but as a necessary correction that will ultimately lead to healthier companies and more sustainable innovation. The shift from valuation-obsessed growth to fundamentals-focused business building represents an important maturation phase.
For entrepreneurs, investors, and other stakeholders in the Indian startup ecosystem, the lessons from failed unicorns provide valuable insights into building truly valuable companies. By prioritizing sustainable business models, focusing on India-specific solutions, and maintaining strong governance practices, the next generation of Indian startups can avoid the pitfalls that have befallen many first-generation unicorns.
The future of Indian entrepreneurship remains bright, but success will increasingly belong to those who build businesses on solid foundations rather than those who merely chase the unicorn status. In this evolving landscape, the true measure of success will be creating enduring companies that solve real problems and generate sustainable value—not just achieving impressive, but fleeting, valuation milestones.
{fullWidth}