Before the pandemic outbreak, China’s startup and venture capital landscape had experienced a continuous growth since 2009, resulting a switch from U.S. to China. From 2016 to 2019, VC funding in the first part of the year 2018 surpassed the U.S. in fundraising and accounted for 47% of the world’s venture capital. The heady pace of the investment market did not begin to slow down until 2019, providing us with ample data to look at and time to reflect before the next boom of venture funding.
Certain reflections have already been done and causes of success or failure have been discussed. For example, Laura Foo identifies some of the problems of Chinese and American startups in “Startup Failures in China and USA” to be “unsuccessful concept, unworkable technology for the idea, overvaluation, using vision as a selling point rather than a specific product.” Meanwhile, the mass market also provides, although organizes in different orders or ways, different lists of the reasons why startups fail overall.
These sources can provide reference from the big picture or from a mere regional angle. However, we would like to take things a bit closer to the reality with greater accuracies. We think it would be more interesting to zoom in the lens to look at the operation management, cost or risk control, and marketing of start-up companies, while analyzing one case from each of the four most funded sectors – Fintech, Education, Healthcare and AI – in China for their success or potential of success.
From lack of product-market fit to disharmony on the team, CB insights breaks down the top 20 reasons for startup failure by analyzing 101 startup failure post-mortems. However, the two main causes we draw from our examples are operational inefficiency and poor marketing/business model, which in nature is really poor managing or lack of ability to work effectively in operation.
Manteia Medical Technologies Co. is an example of weak business fundamentals but has managed to secure millions of funding. The company was founded in 2017 in Xiamen, a coastal city in Fujian province. With a B2B model, the business has developed its own adaptive radiotherapy system (ART) to provide solutions for patients diagnosed with cancerous tumors in hospitals or radiotherapy centers. ART can be used in conjunction with chemotherapy or as a standalone treatment and gives the cancer specialists the ability to deliver precise dosages to the exact tumor location and margins on a daily basis.
Ex-employees would attribute the management problem to the founder, Qi Chao Zhou, who lacked the experience needed in operating, marketing, cost controlling as well as making a sale, even though the establishment of the company was supported by the advantages of technology. Manteia set out to raise money without much research to verify either its technical competitiveness compared to other established competitors in the game or its advantages in obtaining business cooperation with radiotherapy centers or hospitals.
In 2018, it managed to raise a Seed round of a total of 10million RMB in equity investment from Fosunpharma (600196), a publicly traded pharmaceutical company in both Shanghai and HK Stock Exchange. After the investment, the company spent large amounts of funds on extravagant expenses such as leasing over-the-top offices in the most expansive area in the city and paying the founder perks such as maid and nice apartment. There were only 5-6 employees working in an office of close to 300 square meters. This could have been the founder’s preference to run the business on the surface over analyzing or validating actual demand of it, given his background as a Doctor of radiation oncology but not an experienced business manager.
In terms of marketing, a webpage was built at the early stage but with very limited information about in what projects it has taken part and with which hospital or clinic it has signed contracts. Apart from that, there is no record to track its profit model or how well this brand is received by its customers.
However, a check with the reality is that in a span of 5 years, the Seed round injection is the only investment it has acquired according to ZeroTech Research Center, a professional and comprehensive research institution in China’s equity investment industry. Although what is the “deciding factor” in its failure to secure additional rounds of funding is not palpable, it is evident that there is still no specific information on its own website or sales figures to prove any sign of growth during the same period.
Another problematic startup is GitStart, a computer software company backed by Y Combinator and founded in 2017 San Francisco, CA. This company’s business model is fairly innovative for it is one part coding contractor for companies, one part crash course for new developers. The developers work on simple tasks given by corporate clients—usually front-end development work doable within a week—and a more senior GitStart developer checks the code and provides feedback. Corporate clients then review the code and pay if they accept. If the corporate clients liked the work and are interested in hiring the developer, GitStart will help land an interview. And if that GitStart developer is hired, the startup receives a month of salary as a finder’s fee.
Similar to Manteia, GitStart started out with competitive edge in its business model. It has therefore attracted Y Combinator and raised a total of U.S. $150k in funding over one Pre-Seed round in 2019. According to its current employees, the business currently headquarters administration in HK and is setting up a branch in Shenzhen city. Expanding the team into the physical market of China is very likely to be a strategic move for the purpose of securing more funding. In light of the exponential increase of VC investments in china year-on-year since 2009, the overconfidence of founders and the skyrocketed number of angel and venture investors, Chinese startups have been put in the same range as their Silicon Valley counterparts.
However, operating problems have gradually occurred as the team gets larger. GitStart works remotely with a team of 40, which comprises mostly developers from different countries. The company structure is poorly built without setting up basic departments such as sales, marketing, administration, HR, finance, and legal. CEO Hamza Zia is in charge of most of the functions and hires young people with little experience to deal with administration process, external contracts and marketing work.
Unlike Manteia, GitStart has a very clear pricing category for its services and has done several projects, which brought in income flows. So far, its business idea has been proved to work. However, operation inefficiency both in daily running and in hiring the right talents can do great harm to the business and makes further investments even harder. They are likely to find that growing will not keep pace with investing and dollars flowing from the marketplace will not line up with their expense structure.
Poor business model & marketing
Founded in 2019, Fintica Ltd. is a HK based, B2B financial technology firm and a case of poor business model and marketing. It specializes in helping financial industry to comb through raw, unstructured data and reduce costs in both pre-trade and post-trade processes. Its competitive edge lies in the unsupervised manner of its AI to learn patterns and understand complexities and more.
In terms of competitive edge of products or services, unlike the ones of the two companies mentioned above, the strength of Fintica’s AI technology is not at all that evident. In its description of the service, there is no statement about how this one takes precedence over others or what uniqueness about algorithm.
With regard to the marketing operation, the Founder and CEO, Philippe Metoudi opts for securing funding through private talks or meetings with limited individuals, who either have access to quality resources or are motivated to seek out investors on a commission base. This approach may seem like a smart move at the first glance, since it does not require much funding for operation and pays out when there is income flowing in.
Yet, such a business model and marketing operation do not line up with the sophisticated and professional nature of the financial services industry, since it deals with wealth management and things that associated with the idea of trust, credibility and professionalism. Individual or small-scale effort in financing is counterproductive. According to Crunchbase, it has raised only one round, a corporate round backed by Barker & Booth Commercial Agency, but with amount unclarified.
A successful startup that does it right
Genshuixue (GSX Techedu Inc), a technology-driven education company, founded in 2014 by Mr. Larry Xiangdong Chen, who was the Vice President at U.S.-listed New Oriental Education & Technology Group from 2010 to 2014.
GSX Techedu Inc. focuses its core expertise in online K-12 courses with a B2C model. It also offers foreign language, professional and interest courses. The company’s segment includes provision of education services. It operates solely in the PRC and all assets are located in the PRC. The company has raised U.S. $50 million over series A round at a valuation of U.S. $250 million, led by Hillhouse Capital, but invested by Banyan Capital Partners in 2015. Following A round was an injection of U.S. $9million from its key employees before going public and to be listed on the New York Stock Exchange in 2019.
Genshuixue is an example of understanding the market and product and a success relied heavily on the experience and expertise of the Founder, Larry Chen, who played a key role in setting a new record for the A round financing of Chinese start-ups and becoming the first profitable online education company to go public.
Apart from being the Vice President at New Oriental Education, Mr. Chen had been teaching for over a decade before he established his startup. During that time, he wrote test preparation books for the subjects of math, logic reasoning and writing for both GMAT and GRE. Not only he had first- hand experience as a teacher or as a management executive, but also he understood education and teaching. Given his PhD in Economics from Renmin University of China and being an alumnus of Harvard Business School, he was in a better position to understand issues in management, market demand and financing models.
By creating one of the biggest online education platforms, he was pretty much doing what he was really good at with all of his experience and expertise be tapped fully. Therefore, it is not hard to explain why it took him only one round financing before IPO. Also, there did not seem to be much learning process of the business between rounds before the it made profits. The success may be out of the norm, but its efficiency should explain that every weighty factor was in place to achieve its goal.
How to minimize damage from poor management and marketing practices
After assessing four startup companies in China, the three problematic ones have either poor management or poor marketing practices, while the successful one seems to be free from these thorny issues and it also appears to understand business operation as well as the target audience better.
Since most startups start out with the idea of learning along the way, it is highly suggested that they should try to minimize the mentioned risks with business analyzing tools, such as SWOT or PESTLE or preliminary analysis. SWOT can help to improve management efficiency by looking at both the internal and external strengths and weaknesses of a company. Meanwhile, the PESTLE helps with understanding the macro environment and the target market as a whole, so that marketing practices can be conducted with greater efficiency.
However, at the start of a project, it is the preliminary analysis that shall be conducted to determine whether a concept is viable. Normally, factors such as economic, market, industry and social trends that influence the success of business endeavors should be looked at. Risk analysis and cost assessments are critical parts of the preliminary analysis phase, for they help to anticipate as many of the problems as possible in the project management life cycle.
In sum, the combination of three can assist to create a comprehensive idea of the enterprise objective and to state how the outcome is meant to be delivered.