Why Many Unicorn Startups Fail: Key Reasons Behind the Collapse



6/20/20243 min read

Faller unicorns
Faller unicorns

Why Many Unicorn Startups Fail?

Why do many startups just create paper wealth and the wealth never made it into cash?

The startup ecosystem continues to face tougher economic conditions, higher interest rates, and a tight funding environment. As a result, the fall of unicorns – startups valued at over a billion dollars – is becoming a common headline.

Despite initial hype and success, many unicorns ultimately collapse. As a mentor to many startups and a senior executive within unicorns, I've observed several key reasons why many "to-be unicorns" end up failing.

Lack of a Sustainable Business Model Leads to Unicorn Startup Failure

Many unicorns are built on unsustainable business models that rely heavily on rapid growth and external funding.

They tend to overspend after receiving fresh rounds of funding because investors are blindly chasing growth.

These startups often forget the fundamentals of building a solid business. When revenue and growth stagnate, funding dries up, and the entire business collapses.

Unicorn Startups Fall Due to Poor Management by Founders

Early success often comes from an engineering founder who has invented a viral tool.

These founders may become millionaires overnight after their first funding rounds.

However, many lack the skills or experience to manage a growing company.

Common gaps include leadership, sales skills, and financial literacy.

Pride in their initial success can prevent them from admitting these shortcomings, leading to eventual failure.

Failure to innovate and solely focusing on chasing their competitors drive unicorn startups to fail

Let's face it, most startups sell themselves as being innovative and leading players.

In most cases, they are just copying someone else's idea and trying to better it.

They will take the winnings from the replacement market and try to innovate something new.

However, inventing something new is not always easy.

There are many startups out there trying to be innovative, but history shows that less than 0.1% can make it and become mainstream

Startups operate in a dynamic environment, and those that fail to adapt to changing market conditions risk falling behind their competitors.

They often invented a great tool or technology that was cutting edge at the time, however, they spent too much time commercializing it, neglecting the need to keep improving the product at the same time, and in that time other technologies have emerged overtaking them.

Legal and regulatory issues are the cause of unicorn startup failure

Many unicorns face legal and regulatory challenges that can be difficult to navigate.

These issues can range from intellectual property disputes to compliance with local laws and regulations.

A great example is Uber – while being a very useful invention at the time, not every country allows this type of ride-sharing or allows private vehicle drivers to become commercial drivers on their own vehicles.

Many complications with insurance and local laws resulted in hundreds of lawsuits worldwide.

Even though they eventually completed an IPO, it is a good lesson for all to learn.

While the unicorn phenomenon continues to capture the attention of investors and entrepreneurs alike, it's important to recognize the potential risks and challenges associated with these companies.

By understanding the reasons behind unicorn collapses, startup founders can take steps to mitigate these risks and build sustainable businesses that can thrive in the long run.

With over 50 years of experience combined with our team at ToAsia.biz, we are ready to provide business consultation services to lead your business into the Asia Pacific region - profitably.

Talk to us now and see how our playbook is different from other business consultants out there where our focus is to help you expand at the right pace, staying lean and profitable.

Overvaluation is the key reason why unicorn startups fail

Unicorns are often valued at billions of dollars based on potential rather than actual performance.

This creates unrealistic expectations and immense pressure to deliver.

When the market is hot, investments come in at high valuations, and subsequent rounds of funding increase these valuations even further.

However, not every company reaches the stage of a successful public offering. A notable example is WeWork.

Alan Wong
Alan Wong

Alan Wong is founder of ToAsia.biz and a startup mentor with over 20 years of professional experience managing software, Saas and consulting services MNCs.

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