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Avoid these mistakes that doom many start-ups

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Runaway start-up successes such as Alibaba and Uber have prompted big dreams from Silicon Valley to Beijing. But before quitting your day jobs, checkout this list of common mistakes below.

Golden Gate Ventures, an early-stage venture capital firm that invests in Southeast Asian startups, partnered with INSEAD business school to issue a report outlining some of the reasons why success eludes so many founders.

Today, cash is more readily available for start-ups than before, giving many of them astronomical valuations. But that’s not always a good thing, according to the report, because it breeds overconfidence among start-ups and investors.

“Non-traditional investors that flood in boom times, such as (companies) and family offices, tend to accept higher valuations, following venture capitalists that may only write a small check,” Vinnie Lauria, a founding partner at Golden Gate Ventures, told CNBC exclusively by phone.

The report analyzed a selected group of companies in the e-commerce, fintech and software-as-a-service sectors in the U.S. and China that raised more than $5 million to outline reasons why many founders fail to follow in the footsteps of Jack Ma and Travis Kalanick. They include:

 

Operational inefficiency

An abundance of capital and overvaluation cloud the decision-making processes of many start-ups, leading them to make unwise investments that lead to excess supply, inefficiency and a failure to achieve market acquisition, the report noted.

 

Product doesn’t fit in the market

The report pointed to the example of U.S. start-up Blippy, which allowed users to publicize their debit and credit card purchase information on a social media-type platform. The feature did not sit well with a lot of users due to concerns over having sensitive financial information in the public domain.

Since investors back start-ups based on their future potential, instead of historical performances, many charismatic entrepreneurs can have a sway during funding rounds, said Lauria. “CEOs can oversell confidence and trust.”

 

Poor understanding of the market

Chinese start-up Gaopeng, launched in 2011, was a group-buying website that offered deals to customers at local merchants. It was similar to the global group-buying company Groupon, which owned 50 percent of the shares in Gaopeng, while Tencent owned the rest.

The report said one of the reasons why Gaopeng did not succeed was due to the decision-makers’s poor understanding of the Chinese market. “Groupon insisted on using mass email marketing, despite being warned that Chinese people seldom read that type of email,” the report said.

 

Poor product development and competition

Competition was another reason why Gaopeng struggled in China. The report said at one point in time, there were over 5,000 group-buy websites competing in China.

The fierce competition wiped out most, with fewer than 10 surviving today and the majority of the market is dominated by three companies, according to the report.

 

Misvaluation

Accurately valuing a start-up for its future potential is hard and often valuations suffer from noise, subjectivity, information lags, pricing feedback loops and time horizon issues.

Lauria added because many companies are staying private longer before going public in the U.S. and China, it’s driving their valuations higher before they are subjected to the scrutiny of public markets.

The report concluded operational failures and having a product that did not fit the market were key reasons why so many start-ups failed. “A touch of managerial hubris” was also a cause, it noted.

 

Original article appeared on CNBC

Download the full report at Asia VC Investment Report III