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Maintaining a unicorn: how to not crash and burn your startup
Tink Labs and WeWork: unicorns gone wrong
Governments all over the world have been promoting startup culture in recent years, and Hong Kong is no exception. Startups of innovative technologies are seen as drivers to the new economy. However, there were two unicorn (valued at US$10 billion or over HK$ 7.8 billion) failures this year; one originating in Hong Kong and the other in the United States. There are a number of lessons we can learn from these unsuccessful projects.
Hong Kong-based Tink Labs, which offered hotel guests smartphones to use for free, was considered a unicorn startup a year ago. By July this year, there was a report about its cessation of operations in most of its markets, and it also left employees and third-party suppliers unpaid. The once popular American common working space, WeWork, once had a valuation of US$47 billion (more than HK$366.6 billion), plunged to less than US$5 billion (about HK$39 billion), a decrease of nearly 90%.
These two companies share one thing in common: they chased the maximum possible valuation before their business model was proven.
The initial idea of Tink Labs was to enable hotel guests to use smartphones for free as a solution to high international roaming charges while away from their home countries. Its business model was to sell extra services and gather data on customer preferences through using the phones. At one point such phones were installed in 600,000 hotel rooms in more than 80 countries. However, the Financial Times pointed out that in 2017, when Tink Labs fully disclosed its financial status for the last time, the loss in European division had increased by nearly three times to more than £9 million (over HK$90 million) compared with £3.25 million (about HK$32 million) in the previous year.
The US startup WeWork, which provides people with a common working space, was marketed as an eco-friendly co-working space when it was founded in 2010. However, the company later focused on property to boost the valuation. At the same time, it burned through cash at an astonishing rate. In 2018, its loss and turnover had doubled to US$1.9 billion (over HK$14.8 billion) and US$1.8 billion (over HK$14 billion) respectively. In other words, there was no profit at all.
US research firm CB Insights tracked more than 1,100 technology startups which raised their first seed funds from 2008 to 2010, and found that only 1% (12 companies) could reach the success of startup kings like Uber and Airbnb.
At the same time, the research company asked hundreds of leaders of the failed startups to list the reasons of failure, "No market need" ranked first among the top 20 causes of death. One of the interviewed startups pointed out that even with "great technology, great data on shopping behaviour, great reputation as a thought leader, great expertise, [and] great advisors," with limited market size to scale up the business, it was bound to fail.
Explore the blue ocean or stick to the shore?
Many people claimed that they wanted to explore the "blue ocean", to open up a new market space and create new demand. However, when a product or service is new, its business opportunities are unclear with few competitors, it is actually difficult to predict the market potential. The success of a business depends on how much new demand it can generate.
For example, when smartphones did not exist over 10 years ago, everyone was pursuing light, small, thin, or streamlined mobile phones (such as Nokia's best-selling model 8110). At that time, it was hard to imagine a mobile phone without a keyboard, and it was even more unimaginable to have a mobile phone used for internet access, social media, work, photography, and making payments.
To quote another example, I introduced the geographic information system (GlS) to Hong Kong more than 20 years ago. At that time, people were used to paper maps and did not see a reason to switch to electronic maps. Many people looked down on my proposal, and I did not receive any orders in the first year of my business. Today, public and private organisations adopt GIS for planning, management, and coordination work. It would have been impossible for my business to have developed to its current stage without persistence and belief.
Therefore, before an entrepreneur starts a business, they need a solid understanding of the market and their potential customers before chasing the maximum possible valuation. Most importantly, they have to be sure that their products and services can solve customers' problems. If an entrepreneur thinks they are headed in the right direction, persistence is key no matter how hard it gets.
2020 is approaching – I encourage all entrepreneurs to uphold your beliefs and work hard!
Dr. Winnie Tang
Adjunct Professor, Department of Computer Science, Faculty of Engineering and Faculty of Architecture, The University of Hong Kong