Why do many startups just create paper wealth and the wealth never made it into cash?
As the startup ecosystem continues to face tougher economic conditions together with higher interest rates and a tight funding environment, will the fall of unicorns become a common headline?
Despite the initial hype and success, many #unicorns ultimately end up collapsing. Being a mentor with many startups and a senior executive within Unicorns, here are some of the few key observations why many "to-be Unicorns" end up falling.
Why unicorns fall 1: Lack of a sustainable business model
Many unicorns are built on unsustainable business models that rely heavily on rapid growth and funding. They overspend after they have received a fresh round of funding because their investors are blindly chasing growth and the next round of funding. They also forgot the fundamentals of building a solid business is really what they need to do. When the revenue and growth stagnate, funding dries up, and the entire business collapses.
Why unicorns fall 2: Poor management from founders
Most often, a startup's early success comes from an engineering founder who has invented some great tool that has gone viral. As a result, the founders became a millionaire overnight when they got their first rounds of funding. Yet, many founders do not have the skills or experience to manage a growing company. The most common gap we see is a lack of leadership, sales skills, and the ability to read numbers (accounting). However, their pride in success has corrupted them from admitting this and you don't need to be a fortuneteller to see what happens after. How to achieve life harmony and fulfillment?
Why unicorns fall 3: Failure to innovate and only focus on chasing their competitors
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 commercialising it, neglecting the need to keep improving the product at the same time, and in that time other technologies have emerged overtaking them.
Why unicorns fall 4: Overvaluation
Unicorns are often valued at billions of dollars based on their potential rather than their actual performance. This can create unrealistic expectations and put immense pressure on the company to deliver its vision. When the market is hot, or when money is cheap, investments get in at a high valuation. As they grow and seek the next round of funding, they are often sold at an even higher valuation, until eventually they go public by then the founders and investors can cash in.
Yet not every company successfully gets to this stage, a great example was the story of WeWork.
Why unicorns fall 5: Legal and regulatory issues
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. Come talk to us now and see how our playbook is different from other consulting firms out there where our focus is to help you expand at the right pace, staying lean and profitable.
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.