The rate of failed startups in Latin America remains very high. In fact, the region is experiencing a blistering moment in its startup ecosystem.
Although there are no numbers that offer global data for the region, it is estimated that more than 6,000 startups operate in the whole of Mexico, Argentina, Brazil, Colombia, Chile and Peru, which are the countries that have the most dynamic and solid start ecosystems.
This data, which reveals a growing economic activity and an important entrepreneurial muscle, is in stark contrast with another unquestionable reality: approximately 75% of these startups fail after two years of activity.
In other words, only 25% of the startups that are created survive. This figure does not correspond exclusively to the Latin American ecosystem, but it is also applicable to other more rooted and developed ones, such as Silicon Valley. The failure of startups in Latin America is a phenomenon that has replicas in all the ecosystems of the world.
Why do startups fail in Latin America?
So, why do startups fail? In recent years, several studies have been published that attempt to analyze the reasons for this high failure rate.
It is quite revealing that the main cause is not the lack of capital or difficulties in access to investment rounds, but other factors that have to do with the absence of planning, weak market strategies or even problems related to the coexistence between partners.
Fernando Lallana, explains in his recently published book “Sorbos de Emprendimiento” (Sips of Ventures) that “the Latin culture punishes failure, we view it as something bad, we stigmatize it. In the United States and the United Kingdom this is not the case; whoever fails has more weight because he is more able to anticipate failure. Whoever fails here is not given a second chance. This is what observers see and it affects those who experience it”.
There is a social and cultural context in Latin America that generates added pressure on the entrepreneur, who will see the risk of failure as a paralyzing agent that can influence the way he manages his startup in the early stages.
Startups in Latin America face numerous challenges to make them viable for a period exceeding two years. It is within this period of time, which is key in the incubation and acceleration of a startup, where decisions are made that can support the success of a company or its failure in the short term.
Latin startups: the fear of failure
Highly publicized due to the depth of its analysis was the report issued last year by CB Insights, entitled Top 20 Reasons Why Startups Fail. It found that surrounding yourself with the right people is one of the keys to a company’s success and the fact of moving with the wrong team can mean the chronicle of a death foretold.
Among the least serious reasons is the inability to correct bad decisions, being worn out due to overwork, failure to seek support in professional networks (particularly from investors), legal expenses (royalties for the use of copyrighted content or conflicts with other companies) and the lack of interest in financing the idea. These factors were part of the causes for the failure of startups.
There is also a context that influences not only the future of these companies, but also the perception that the main actors in the ecosystem have of them; that is, investors, accelerators or risk funds.
The result of this is that Latin American startups are not rated the same as those born in Silicon Valley. This frustrates many Latin American entrepreneurs seeking investment, since they do not understand why Latin American capital does not take risks with their projects.
There are important reasons why investment valuations in the early stages in Latin America are lower. On the one hand, there are few acquisitions in the region, and when they do occur, they tend to have lower valuations than their counterparts in other parts of the world.
Related article: How to create a startup in Latin America and not die trying
Latin startups, a vision and ambition problem
On the other hand, most Latin American companies are not concerned about competition, either by technology or by other forces in the market.
Many large companies in Latin America, including those listed on the stock exchange, are managed by families, have been in business for generations and their objectives are much more oriented toward maintaining their position and benefits than growing or remaining competitive in the market.
This lack of perspective affects options in terms of capital access for startups, which unlike what happens in the United States or Europe, do not usually find funding in traditional large companies based in their respective countries.
But together with these temporary or situational factors, there are others that are reproduced in a systematic way each time the failure of a startup or its risk areas are analyzed.
The Failure Institute recently made a study on business failure and transformed it into a learning experience. Its conclusions show that the main reasons why startups close in countries like Mexico are: insufficient income to survive, lack of indicators, lack of analysis processes, poor planning and execution problems.
Related articles: These Are the Top Six Incubators in Latin America
Inadequate evidence, imminent failure
It is the main reason behind failed startups in Latin America. That is, proper research was not done before even deciding to create the company. This factor relates to real situations that any entrepreneur should face and know in advance: how to access the market, what is your product’s demand, who is the competition, what is its viability.
Poor validation of hypotheses and assumptions is usually the beginning of the end, along with the anxiety to grow quickly and in an unsustainable manner. A high percentage of startups that fail recognize that they were not able to stamp a clear business model to the idea they had. Therefore, they never became profitable.
The Incompatibility of the team is one of the most common causes of failure for startups in Latin America. It is a factor cited very often by companies that have failed. It has to do with how the members of the founding team work together and if they have the right skills to overcome future challenges.
Lack of persistence
The lack of persistence is, paradoxically, along with the desire to grow too fast, one of the reasons that push thousands of startups into oblivion every year. The leaders unable to establish a clear strategy for the company and stay with it long enough to succeed.
In the midst of it all, large amounts of money and effort are lost, yet little patience is invested. The desire for quick money along with constant change in strategies, decisions and objectives is usually a direct path to failure.
Bad relationship with money
Despite the above, it is evident that economic resources are vital for the development of a startup. But we should really talk about the mistakes concerning the decisions to spend that money. A high rate of failed companies recognize that they did not know how to make the right decisions after running out of funds and were unable to access new funding channels. Let’s keep in mind that companies have problems in this area when they are in the incubation stage and have no money, but when they receive injections of capital, they spend it without control.