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India’s Silicon Valley, Bangalore, was a startup darling just two years ago, but now its star appears to be dulling.

Don’t get us wrong, Bangalore has a lot going for it — Amazon and Uber have offices there, it is home to over 2,000 active tech startups — but according to a recent report ranking startup hubs, the city has fallen five spots to No. 20 out of 55.

Hot new Asian hubs, Beijing, Shanghai and Singapore, have surpassed it, according to Startup Genome’s startup ecosystem report.

So what’s causing the decline and what can be done to stop Bangalore from losing its edge?

Image: STARTUP GENOME

Talent issues

Despite being a "magnet" for technology talent, Bangalore seems to have a quality problem. The report notes: "Engineers haven’t been hired very quickly, experience is average and visa success is low."

Also, there’s a lot of churn among employees who move around to seek better opportunities. This could be because Bangalore is among the least-paying startup cities in the world for software engineers, who draw an average annual salary of $8600 — 13 times less than that in the original Silicon Valley.

Better salaries could possibly arrest attrition and attract better quality talent.

Low returns for VCs

Bangalore ranks a decent seventh globally when it comes to valuations, but has a "very low exit sub-factor." That basically means that venture capitalists who invest in the city’s startups have seen little or no success. Often times, companies have shut down within a year of their operations, drowning investor dollars with them.

Low exits, the report explains, could mean two things: Either the city has a bright future as these startups mature or there is trouble at the top of the market with acquisitions.

“Exits are tough in the Indian ecosystem only when they are incorrectly evaluated. A lot of times I have seen Indian companies making projections similar to their Silicon Valley peers without actually having the penchant to create global brands like the Silicon Valley companies do,” says Kanwaljit Singh, founder and CEO of Gaussian Networks.

Getting real is the solution. Me-too startups have to be pruned. And the genuinely scale-able ideas with a potential for impacting millions of lives have to be backed.

Profitability problem

Most startups in Bangalore are cash-strapped. Even Flipkart, the poster-child of India’s startup economy, has yet to turn a profit after 10 years.

While funding seems fine, profitability has been the Achilles’ heel for the city’s startups. Even Delhi, India’s capital, reportedly has more profitable startups.

There is a widespread belief in India that marquee startups are justified in going through a long period of heavy losses because Google, Facebook and Amazon went through this.

Domestic competition

While Bangalore is still India’s Silicon Valley, cities like Chennai and Pune are catching up.

Chennai down south has already evolved as the SaaS hub of the country with companies like Zoho and Freshdesk, backed by rich investors.

And Pune in the west, which houses one of the three Microsoft data centers in India, is emerging as a strong competitor to Bangalore because of its vast IT pool, cheap real estate and favorable investment climate. Some reckon that it might soon outpace Bangalore completely.

But if Pune and Chennai want to unseat Bangalore, the cities’ startups must learn from its mistakes.