Latin America is experiencing a boiling moment in its startup ecosystem. Although there are no figures that provide global data for the region, it’s estimated that over 6,000 startups operate in Mexico, Argentina, Brazil, Colombia, Chile and Peru, which are the countries that have more dynamic and solid ecosystems. This figure, which reveals a growing economic activity and an important entrepreneurial muscle, contrasts with another unquestionable reality: approximately 75% of these ventures fail after two years of activity. That is to say; only 25% of the startups that are created survive. This figure doesn’t correspond to a singularity of the Latin American ecosystem but it also reproduces in others that are deeper and more developed such as Silicon Valley.
But why do startups fail? In recent years, several studies have been published that try to analyze the reasons for this high percentage of failure. It’s revealing that the main cause is not the lack of capital or the difficulty of access to investment rounds, but other factors that have to do with the absence of planning, the weakness of market strategies or even the coexistence problems between startups partners.
Highly publicized by the depth of its analysis was the report made last year by CB Insights. It found that being around the right people is one of the main keys to a company’s success and the fact of moving with the wrong team can be the chronicle of an announced death. There is also a context that influences not only the future of these companies but also the perception that they have of the main actors of the ecosystem; that is, investors, accelerators or risk funds. The consequence of this is that Latin American startups don’t have the same values as those born in Silicon Valley. This frustrates many Latin American entrepreneurs seeking investment, since they don’t understand why Latin American capitals don’t risk 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. On the other hand, most Latin American companies don’t care about competition, either because of technology or 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 aimed at maintaining position and profits, instead of growing or remaining competitive in the market. This lack of perspective affects the options for capital access of startups, which unlike what happens in the United States or Europe, don’t usually find funding in traditional large companies in their respective countries.
But along with these context reasons, there are others that reproduce systematically each time the failure of a startup or its risk areas are analyzed.
It’s the main reason for the failure of Latin American startups. That is, the homework wasn’t done before deciding to create the company. This factor is identified with real situations that any entrepreneur should face and should know beforehand: how to access the market, what is their product demand, what is the competition, what is its viability. The lack of validation of hypotheses and assumptions is usually the beginning of the end along with the anxiety to grow quickly and unsustainable. A high percentage of startups that fail recognize that they weren’t able to give a clear business model to the idea they had. Therefore, they never became profitable.
Team incompatibility is one of the most common causes of a startup’s failure in Latin America. It’s a frequently pointed out factor by companies that have failed. It’s about how the members of the founding team work together and whether they have the right skills to overcome future challenges.
THE 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. Leadership is unable to establish a clear strategy for the company and stay with it long enough to succeed. On the way, great amounts of money and effort have been lost but little patience has been consumed. The ambition of quick money and the constant change in strategies, decisions and objectives is usually the direct path to failure.
BAD RELATIONSHIP WITH MONEY
In spite of all the above, it’s evident that economic resources are vital for the development of a startup. Rather, one should specify the error in the decisions to spend that money. A high percentage of failed companies recognize that they didn’t know how to make the right decisions after running out of funds and were unable to access new ways of financing. One would have to keep in mind that companies have problems in this area when they are in the incubation phase and have no money, but also when they receive injections of capital that they spend without control.