Editor’s note:
Author: Zhu Xiao Hu, managing director of GSR Ventures, whose investment in ride-hailing company Didi Chuxing, bike-sharing startup Ofo and food delivery service provider Ele.me earned him the nickname “Unicorn Hunter”. KrASIA.com has been authorized to publish.
The destiny of a startup is affected by numerous factors, such as its financing activities, management decision from entrepreneurs and market trend.
In Part 1 and Part 2 of the feature, Zhu points out 4 commonly made mistakes in starting a startup: getting financed too easily, betting on unscalable niches or projects beyond startups’ competence, betting on fast growth and chasing after investment buzz.
In this part, Zhu explains:
- What should startups target at different stages of financing?
- Why should entrepreneurs fend off potential competition before going deeper into any field?
This is Part 3 of a 3-Part Series.
5. Not getting the job done for each financing round
Much has been said about what the startups should get done for each financing round. Still, many startups have sunk due to their failure to get relevant work done.
Series A financing round:
(1). Team building
Being able to work as a team is a primary criterion for our investment decisions. We usually won’t invest in the startups when their team members have been working together for only less than six months. Steering a startup is strenuous, so it is important that the team doesn’t fall apart midway.
(2). Figuring out an effective business model
The startups boom in the mobile internet industry came along almost at the same time in China and the United States. This means that there’s almost no proven business model for any startups to follow suit. Therefore, the entrepreneurs, while starting their businesses, must be clear about the pain points they set out to address and the value they can deliver. A startup is certainly doomed if its CEO himself or herself doesn’t even has the faintest idea of the answers to the above questions.
(3). Spending wisely
It is suggested that a startup should keep its spending at ¥300,000 to ¥500,000 a month so that it could have more money to help it pull through its early stages. Finding the right business model takes trial and error. This is true for all startups.
When Baidu was still in its infancy, it tested six business models simultaneously and eventually went with paid search. But, Baidu’s case is not typical. For many startups, the time for locating the right business model is even longer.
Series B financing round:
(1). Verifying the feasibility of the business model
This was one of our major concerns while investing in Ofo. In the beginning, Ofo operated its bike-sharing business only in campuses, which, compared with the mass market, are relatively small. In campuses, each of its bikes could be used at a high frequency, which was about seven to ten times a day. According to calculation, a bike could make ¥5.00 to ¥6.00 each day, while the procurement cost for each bike is ¥200. Therefore, it wouldn’t take much of an effort to find out how long Ofo could make even. But, it was still unclear then whether the business models would work as expected outside the campuses.
(2). Verifying the replicability of the business model
A business model works well in Beijing might not fare well in other cities. If a startup can successfully replicate its business models in two of the megacities in China, it will, most probably, nail the first or second position in its field.
Series C financing round:
(1). Expansion
If everything goes as expected, the startups, in this stage, should zero in on extending into more cities, say over 20 cities, by reeling in more capital. No matter how the fundraising goes, the startups should go on with their expansion.
I also learned my hard lesson by investing in local information website Baixing.com, not 58.com. In other countries, the equivalents of Baixing.com succeeded, while those of 58.com failed. But, the picture is completely different in China. 58.com was the one that succeeded. It had managed to net much capital. Eventually, it went public and took over its counterpart Ganji.com.
(2).Shoring up weaknesses
In the early days, the focus of the startups was usually all on magnifying their advantages, not shoring up their weaknesses. For them, this is attention well placed. A good business idea often attracts hundreds of companies.
Therefore, it is best that a startup hones its core advantage to the maximum impact so that it can leverage that advantage to rope in more VCs and eventually bring its business on a sound development track. In the Series C financing round the startups can then spend more time shoring up their weaknesses, as, in this stage, the weaknesses play a major part in deciding if the startups can rise to the top or not
6. Inability to safeguard what’s been achieved
Establishing your market presence is not the end. The Chinese internet industry is a winner-takes-all market. The competition is so intense that unless you create high enough barriers to potential competitors, you risk being knocked out by giants.
The extent to which your business relies on others for traffic and funds
A company that relies heavily on external platforms for traffic is often weak in the face of competition. Traffic is the steadiest and most valuable when it’s acquired through the offering of quality content and social media marketing.
That’s why the social networking platform 51.com, although having received capital injection from Sequoia Capital and Giant Interactive Group and garnered 100 million users, lost the market to Tencent, while Momo, the location-based instant messaging app, which has acquired traffic itself instead of relying on Tencent or Baidu, was able to rise above the competition.
Control over customers and services
For instance, domestic service apps tend to have weak control of their services as customers could easily bypass the platforms and sign long-term labor contracts directly with the domestic workers.
Number of vertical markets a company can cover
Coupons and group buying services deal with the same group of merchants and users. However, coupons focus on the offline market and can cover only one or two vertical markets, while group buying services can cover five to ten.
When a competitor has the potential to expand into ten times more vertical markets than you, there’s just no chance you can beat it.
A company’s management capability
Meituan.com lagged behind Ele.me at first in the food delivery race because Ele.me started three years earlier. But when Meituan.com’s group buying business already stretched across over 200 cities, Ele.me had just raised its series C round and was operating in some 20 cities only. Wang Xing, the founder of Meituan.com, therefore seized the opportunity and quickly made the company’s food delivery services available in the 200-plus cities.
This posed a challenge for Ele.me. The company was founded by a group of fresh graduates and didn’t have the capacity then to recruit or manage a workforce of a few thousand, making it unlikely for it to expand its operations as extensively as Meituan.com did.
However, in China’s internet sector, when your rival has already gone a step ahead, you’ll have little chance of ever catching up if you do nothing over a period of six months. As a result, Zhang Xuhao, Ele.me’s founder, decided to accelerate the expansion too.
As it turned out, Zhang was smart enough to have brought his strength into play and developed a superb marketing management system, through which the company’s management can monitor from headquarters the number of staff, the progression of marketing campaigns, the clients acquired and the contracts signed in each city as well as manage employee training and recruitment programs on the go. Ele.me has thus defended its position in the market by improving its management capability.
Therefore, I strongly suggest entrepreneurs make sure they have the capability to fend off potential competition before going deeper into any field; otherwise they risk having their achievements stolen by others in the end.
