The successes of start-ups like Uber and Alibaba have encouraged big dreams from Silicon Valley to Beijing. But before leaving your regular jobs, just take a look at some common issues described below.
An early-stage venture capital firm Golden Gate Ventures which invests in Southeast Asian startups has partnered with INSEAD business school just to issue a report outlining some of the reasons ‘why success eludes so many founders?’.
In the present time, it has become easier for start-ups to get cash to make initiations. But, as per a report, it is not a positive point, because this is just building overconfidence among investors and start-ups.
Vinnie Lauria who is a founding partner at Golden Gate Ventures, told CNBC exclusively by phone, “Non-traditional investors that flood in boom times, such as (companies) and family offices, tend to accept higher valuations, following venture capitalists that may only write a small check”.
This report has described a selected group of companies in the field of e-commerce, software-as-a-service, and fintech in China and the US that raised more than $5 million to outline reasons why many start-up founders fail to chase in the footprints of Travis Kalanick and Jack Ma. They include:
- Operational inefficiency
The report described that loads of funds and unhealthy decision-making processes of most of the start-ups, pushing them to make foolish investments that lead to inefficiency, excess supply, and a failure to attain market acquisition.
- Product doesn’t fit in the market
The report is pointing at the US start-up Blippy. This start-up allowed clients to publicize their credit card or debit card information on a social-media platform. This feature is not acceptable by a lot of users just because of the reason of sensitive financial information leakage.
According to Lauria, “Since investors back start-ups based on their future potential, instead of historical performances, many charismatic entrepreneurs can have a sway during funding rounds. CEOs can oversell confidence and trust”.
- Poor understanding of the market
This point is about Chinese start-up Gaopeng. This is a group-buying website that offered deals to clients at local merchants, and launched in 2011. It was similar to the company Groupon, which owned approx 50% of the shares in Gaopend, while Tencent owned the others.
The report described, “One of the reasons why Gaopeng did not succeed was due to the decision-makers’ poor understanding of the Chinese market. Groupon insisted on using mass email marketing, despite being warned that Chinese people seldom read that type of email”.
- Poor product development and competition
Competition is another point of Gaopeng struggle in China. According to the report, there were approx 5,000 group-buy websites competing in china at one point in time. In the present time, the competition remained among the 10 companies and the majority of the market is dominated by three companies.
Valuing a start-up for its future potential with accuracy is difficult and it may suffer from subjectivity, noise, pricing feedback loops, information lags, and time horizon issues. Lauria added that in the US and China, many companies remain private for long-time before subjected to the survey of the public market until they drive their valuations higher.
In the conclusion, the report stated that operational failures and unsuitable product were the key factors behind the failure of many start-ups. It also noted, “A touch of managerial hubris” was also a cause.