Caution! These Three Mistakes in Choosing Business Direction Could Lead to Startups’ Failure
GSR Ventures, a VC firm and one of the investors behind DiDi and Ofo, has singled out three no-nos for aspiring entrepreneurs: chasing after hotspots, being too ambitious and inability to seize the opportunities in familiar areas.
Many people have experienced the painstaking process of choosing a direction for their new businesses in the early days of their entrepreneurship.
Opportunities abound, but which is the right one for you?
Painful as it may be, it’s a crucial step that will have a major impact on myriad aspects of a startup’s future operation, including the markets to tap into, the consumer group to target, the pain points to address, the technical requirements to meet, the competition and challenges it will face, its business strategies, team building, etc.
Yet many entrepreneurs failed to attach due importance to this step and some made hasty decisions, which has turned out to be at the root of the failure of many startup projects.
Here are the three mistakes aspiring entrepreneurs commonly make when picking business directions.
Chasing after hotspots
You noticed a business that’s gaining traction and thought it might be a promising market. You got excited and rushed to start a business in the same area with a couple of friends.
Such tendency among entrepreneurs has fueled the boom of many emerging markets, such as group buying in 2011, O2O business in 2013, smart bands in 2014, personal assistant services in 2015, live streaming and shared bikes in 2016 and power bank rental in 2017.
It’s not uncommon for such fields to see the emergence of dozens of startups in just a few months.
On the face of it, chasing after hotspots allows you to skip the direction-picking step and invest your energy on operation and pushing your business forward.
But the problem is: When it comes to hotspots, only a tiny number of companies are there to stay. The majority vanish eventually.
In our view, hotspots are created, not discovered. Some companies are able to identify unaddressed demand and come up with corresponding solutions.
If the solutions are well received by the market, people will start to pay attention and capital will pour in. The field will then be hailed as a market with huge potential, drawing more startups and investors.
However, it should be made clear to would-be entrepreneurs that few of the unicorn companies we see today, be it Ele.me, DiDi or Ofo, started out as hotspot chasers.
Instead, they share some other similarities: a thorough understanding of user demand, critical insights into market trends, confidence in their business strategies and resolution to pull through in the face of major setbacks. Their ideas might sound naïve to most at the beginning, but have the potential to evolve into whole new industries.
So, you actually have a better shot at building a great company by starting down a road barely taken. The paths everyone sees are usually not for startups. To avoid direct competition with established giants, you have to explore your own.
Being too ambitious
Many would-be entrepreneurs have the vision to change the world, create value for society, and make people’s life better. It’s good to be ambitious, but ambition may sometimes become a burden and cloud your judgment.
When you are preoccupied with big ideas and much-chased-after areas, you run the risk of underestimating the difficulty of entrepreneurship and overestimating your ability to run a business, and may choose to start your business in an already fiercely competitive market or an area eyed by established giants.
It’s often neglected that the perfect areas to start a business are in fact those niche markets.
Take autonomous driving for example. There’s no denying that it’s a market with huge potential and one that’s expected to change people’s lives fundamentally.
Google and Baidu were the first to tap into the area, followed by a number of autonomous driving startups since 2015. Then in the second half of 2016, car makers, automobile dealers, chip manufacturers and internet giants began to join the fray too, bringing with them massive investment and cooperation/acquisition offers and consequently intensifying the competition in a still-fledgling industry.
The thing is: Autonomous driving is an area with high barriers to entry. To survive, a company must have strong R&D capabilities. Also essential are experience in related areas, sufficient financial support, backing of well-established industry players (such as car makers), viable applications and a team of experienced R&D engineers.
Without these, the path ahead for startups is set to be a tough one. After all, there’s little resolution alone can achieve.
Inability to seize the opportunities in familiar areas
“Scenery is nowhere to be found in familiar surroundings,” so wrote Wang Guozhen, a poet in China.
Poetic as it sounds, this thought might actually steal away the startup opportunities right under an entrepreneur’s nose. Many entrepreneurs seem to be tuned to think that they shouldn’t start businesses on their existing fields, even though they have worked the hard way to build up their experience and resources.
So, when it comes to starting their own businesses, the entrepreneurs, quite often, wave off their old area of expertise. Choosing against novelty or curiosity simply doesn’t agree with the entrepreneurs’ nature. An entrepreneur, quite often, would end up in a new or emerging area while starting his or her own business. And there begins the “trial-and-error journey”.
However, it is quite possible that, while he or she is busy grappling with his or her own conundrums in the new area, several other startups in his or her old area have already risen to the top. This always comes as a shock to them.
This is not made up out of thin air. It’s kind of a realistic portray of the startup frenzy in the last two years. The entrepreneurs lack no adventurous spirit, so it’s quite understandable that they want to venture into new areas. But, their ignorance of the new area is kind of a double-edged sword.
On the one hand, it may help them spot some rare opportunities in the new area or work their way into the area from some different paths. On the other hand, it’s also possible that they will get the wrong end of the stick in the first place, which will eventually cause their businesses to fail.
The stakes are high for outsiders to start businesses in an alien area. Whether the businesses can succeed or not often depends on the resourcefulness of the founder and also a bit of luck.
The entrepreneurs are often reluctant to start businesses in their old areas. It’s probably because that they have stayed in that area too long, and this has kind of worn off their enthusiasm to start businesses. Or, maybe they are just too prudent to place a sure card.
The fact is starting a business in familiar areas usually can help entrepreneurs circumvent pitfalls. Plus, the acquired skills or knowledge in an existing area can also help generate quick results.
Most importantly, the old connections of the entrepreneurs might even help pull their new businesses out of difficulties at some point.
In a nutshell, “entrepreneurs should start businesses in familiar areas”, why not?
We knew many promising entrepreneurs who had had a hard time choosing the right business directions or pushing their businesses forward. But, there were also some entrepreneurs that have managed to grow bigger after changing their business directions several times.
Starting up businesses is not a game, it is of high stake and high opportunity cost. That’s why the entrepreneurs should avoid “following the trend” and “chasing hotspots” when it comes to selecting business directions.
Choosing the right business direction is half work done for the entrepreneurs. The entrepreneurs can’t make any hasty decisions before thoroughly assessing the aspects including social trend, market, competitive landscape, customers’ requirements, entry point, growth prospect, cost and profit capability.
Charging into a new area mindlessly often results in failure. And the entrepreneurs should be clear that any hindsight serves no purposes of saving a failed business.
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