The worldwide startup investment landscape has significantly changed over the past decade. This is especially true in China where VC investments have annually increased since 2009. Nevertheless, this rapid growth has two sides. You may be witnessing the rise of startups like Uber and Alibaba but there are, in fact, several startups in China and the United States that face problems and are failing due to various factors.
A report by Golden Gate Ventures together with INSEAD revealed that there are 5 core factors that play a part in the fall of startups in China and the United States.
Operating inefficiently - This involves large investments and overvaluation of the startups. This has lead to an inappropriate choice of investment and making market penetration difficult.
Products do not suit the market - The study found that some startups in the USA require customers to reveal personal information regarding credit and debit cards usage on social media. Although this is beneficial to the investors, consumers feel differently. This is because such information is confidential. With investors that only hope for future benefits rather than profoundly studying past performances, although attractive to investors, it may, in fact, lead to failures.
The number of investment firms in the U.S. and China increased significantly in 20 years.
Insufficient knowledge about the market - Penetrating the market is very important. If you do not understand your market, you can easily fail. Many startups fail to efficiently analyze the market. For instance, an unsuccessful strategy used in China is the use of email marketing. Without careful consideration, entrepreneurs fail to realize that Chinese consumers do not prefer this type of email.
Lack of product development in a highly competitive market - In an enormous market like China, business is carried out in an aggressive manner. Some businesses in China have over 5,000 competitors. If startups lack the product development process and/or fail to provide continuous services, they may not succeed. In time, there will only be a few remaining players that dominate the market.
Overvaluation - Precisely evaluating the value or revenue of startups is quite challenging due to the several factors involved. For instance, when the founder’s vision clashes with the current market situation, lack of precise information, or delay of the price evaluation process. Several startups in China and the United States realize the overvaluation situation only when they have publicly launched following their long and isolated development period.
Although there is no single secret recipe when it comes to operating a successful startup, there are lessons that can be learned to help investors and founders better decide about the investment. In fact, these lessons may also benefit Southeast Asia’s ecosystem that is continuously growing and becoming more and more influential.