What does it take for a startup to make it?
Venture capital investors identify traps that tech entrepreneurs should avoid
21 Jun 2021 | Janette Chen

China is fast becoming a global leader in technology and innovation. Spurred by strong market demand and policy support, technology startups are sprouting in key cities across the country, and in various stages of development, eager to become the next WeChat or Duoyin. But while some of them will probably turn into thriving businesses, many are likely to fall by the wayside.

What makes the difference between success and failure? At a recent event organized by Slush China, several venture capital experts shared their experiences and advice with budding entrepreneurs, seeking to help them avoid the common traps that startups normally encounter on their way to market.

Unlike in other industries, founders of tech companies tend to come from a highly technical background. They are normally experts in a certain area – some of them have been doing research in the university before starting a new company, while others might have years of working experience in a particular industry.

As such, tech people tend to keep a strong faith in the field where they choose to set up a business – and this is quite common among those who have a strong academic background.

“Tech entrepreneurs can be trapped by their faith in achieving something sometimes,” says Ren Jia, president of Simic Group, an innovation incubator focusing on internet of things (IoT) and advanced sensors. “Tech people can have a very strong faith and find it very difficult to adjust their goals,” Ren observes.

But he stresses that tech founders should strike a balance between keeping faith in their field of expertise and adjusting their goals and business models to the demands of the market.

Long R&D period

Ren shares a successful case in his incubator. Lu Yimin has a PhD from an overseas university. “He initially set up a company aiming to design an integrated circuit (IC) for the millimetre-wave radar of automotive grade. But as he continues with the R&D, Lu realized that he might not be able to achieve his goal quick enough given the long R&D period. Therefore, he adjusted his target,” Ren recalls.

Lu decided to start working on IoT projects, which are much easier to bring to fruition than his initial goal. “With his knowledge in the more advanced technology as an overwhelming advantage, Lu succeeded to find clients for his projects and the multiple rounds of fund raising went smoothly,” Ren says.

“Some may find It hard to differentiate between keeping the faith and being too obsessed. Tech entrepreneurs need to find a balance and learn to adjust their goals,” he says. 

A startup founder’s ability to self-regulate and adjust their goals also indicates that they have flexibility, which is a very important quality for an entrepreneur that investors are looking for.

Being able to find the right market is another valuable quality. “Entrepreneurs with tech background tend to focus on what they can do and choose to start a business in the areas they are good at. But in fact, they should focus more on what the market needs instead,” says Zhu Jia, an associate partner at Lightspeed China Partners, a China-focused venture capital firm.

“We cannot say that those who possess the best technology are the best entrepreneurs,” Ren says. No matter how advanced a technology is, it won’t make much sense if the founder cannot find a market for the technology.

“It is even better if the tech founder can identify a certain market demand which is not yet met by any existing products, and innovate in that space. This is more likely to bring about a great company,” Zhu adds.

Predicting market demand

Zhu cites the case of Bestechnic, a supplier of smart audio SoC (a system on a chip). “The founder of Bestechnic, Zhang Liang, is very good at understanding and predicting market demand. He started to work on the SoC of True Wireless (TWS) earphones even before they became popular. So Bestechinc became the leader in this space when TWS earphones became widespread, led by AirPods,” he notes.

Given the strong market momentum, Bestechnic was able to expand its revenue and meet the requirements to list on the STAR Board. Now the company is worth about 50 billion yuan (US$7.8 billion), according to Zhu.

A thorough and timely understanding of the competitive landscape is also a very important quality for tech entrepreneurs.

“The technology industry can develop very fast, especially in the IC space. But some of the entrepreneurs fail to understand that their competitor can run faster than them, and when I ask about the competition, some of them even talk about the products that were launched years ago,” says Jiang Hui, head of investment in the IC sector at Shanghai Lingang Kechuang Investment Management and Shanghai AI Industry Investment Fund. 

Jiang reminds tech entrepreneurs to avoid “marking the boat to find one's sword”, meaning they should not get stuck in old beliefs, and must stay alert for industry developments. Whether they decide to pursue a “red ocean” strategy with focus on pricing or choose to find a niche market depends on a solid understanding of the market.

“The capability of making the right decision is a quality of startup founders that investors value. And this is defined by the founder’s experience, market savvy, understanding of the competition, etc.,” notes Hu Yue, managing director at Empower Investment. “The decision will impact the strategy, the deployment of resources, the cost of time, and the teamwork,” he says, adding that this means budding entrepreneurs should keep practising and improving themselves. 

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