Uncertainty is the travel companion of any entrepreneur, but it reaches its peak in the so-called valley of death, the period of time during which the project does not yet generate regular income, but already faces significant operating expenses. Only a few startups, the most resilient, find the oasis of profitability and emerge successfully from this journey in the desert, while a high percentage perish before reaching the desired financial balance (‘breakeven’).
In this phase, in which companies are forced to look for a formula that allows them to survive, there are some that change their initial approach because it is wrong. Others spend many years in losses, but they close rounds that guarantee them liquidity. Those who are incapable of reacting end up dying and adding to the statistics: nine out of ten startups fail in their first years of life, according to the Bankinter Innovation Foundation, since, no matter how brilliant an idea is, you have to know how to implement it, convince to investors that it is worth it and sell it on the market.
The Spanish ecosystem has burned through stages at high speed and last year it surpassed the barrier of 100,000 million euros in valuation, placing it behind France and Germany, but ahead of southern European neighbors such as Italy and Portugal, as includes the latest edition of the report ‘The Spanish tech ecosystem report’. Our country has made an effort to position itself among the continent’s main powers, but innovative entrepreneurship, by its very nature, is risky and error is part of the path. This is demonstrated, for example, by the fact that national startups present a age of 3.19 years on averageaccording to the Entrepreneurship Map 2024. Experts agree on the need to tackle obstacles such as the bureaucratic tangle or access to funds to save the dreaded valley of death and underpin the maturity of the Spanish startup galaxy.
Ignacio Guasch, director of Scouting and Business at Oryon Universal, an accelerator that invests in seed projects, speaks of an average failure rate of 80% in the first three years of life, which he believes is probably somewhat higher in our country. «The Startup Law contemplates a 50% deduction in personal income tax for investment in this type of company on a maximum base of 100,000 euros, which helps to obtain capital, but administrative obstacles or slow access to certain subsidies mean that “Here it is a little more complicated to maintain projects at critical moments,” he justifies.
On the part of entrepreneurs, a common problem is selling less than projected, incurring higher expenses than expected and having clients who pay later than expected. “We invite you to be very prudent in spending and calculating income, to dream big, but act small,” says Guasch, who also advises that you seek the opinion of as many people as possible because it is a way to validate your idea. At Oryon they support entrepreneurs in polishing the product or service offered and connect them with potentially interested contacts, in addition to giving them tools to develop their activity. In this sense, Guasch highlights the crucial role of accelerators and incubators, which contribute to “opening important doors at appropriate times.”
Equally relevant are the investors who, in addition to the monetary amount, provide their experience, mentoring and strategic connections. As Pascual Parada, Academic and Innovation Director of IEBS Biztech School, says, “it is ‘smart money’, which is an extra when it comes to startups navigating the valley of death.”
Variable duration
But how long does it take a company to get out of this swampy terrain? Parada points out that it depends on each case, from weeks or months to years. It establishes two differentiated groups: «There are startups that immediately add real value to the market and, therefore, monetize from the early stages. Your probability of overcoming the valley of death is higher.” The other category is growth startups, like Airbnb, which require a large community to start monetizing. «In this class of signatures, which generate what is known as network effect, “The valley of death becomes very long and they require more investors to support the capital needs they have.”
In both situations, entrepreneurs should avoid a series of setbacks that can ruin the company. “A common mistake is that they focus on the product and do not fully understand the problem to be solved,” says the expert, who identifies making a minimum viable product that is too expensive as another common mistake. “The key is that it allows the business to be validated as quickly and with the least amount of money as possible,” he completes. Likewise, they face the lost cost bias: “When they have invested resources in a solution, they are reluctant to pivot and make drastic decisions.” Finally, Parada warns that many base their projects on genuine and innovative ideas, which, although positive, suffer from a higher mortality rate. “There is a lack of a mentality willing to look for models that already work in other markets and that, properly transformed, can succeed here,” he says.
Miguel Ángel Rodríguez Caveda, CEO of BeHappy Investments, emphasizes the challenge of raising capital: «As indicated by the CB Insights report ‘The Top 12 Reasons Startups Fail’, around 38% fail because they exhaust their financial resources or not. “They get additional funding, which highlights the complexity of managing resources effectively during the valley of death.” That is, any error in financial or strategic decisions can seriously jeopardize continuity. Furthermore, at this stage, startups focus on validating their product or service in the market, a process full of uncertainty, since it is not certain that customers will accept it. From the point of view of the partners of this impact fund, the CEO emphasizes that it is essential for firms to demonstrate traction (concrete evidence that their business model is viable) to capture their interest.
«Every euro counts, so decisions must be strictly aligned with the objectives of validation and survival. One of the most effective strategies is to develop a minimum viable product, which allows collecting early feedback from the market without wasting resources on functions that may not be important to customers,” says Rodríguez Caveda, who also alludes to cash flow management. «Many startups invest in large marketing campaigns or infrastructure before they have a solid foundation. Keeping a controlled burn rate (rate at which a company consumes its capital) can make the difference between reaching the next round or staying halfway,” concludes the expert. And a healthy financial situation is a plus to boost future growth.
That startups demonstrate traction is key to capturing the interest of investors
This is one of the lessons that serial entrepreneur María Luke has learned, especially with her second project. In 2018, the first one, Fixme Connect, was launched, a marketplace that connected physiotherapists with companies and that, in two years, added more than 20,000 clients. “We quickly began to collect and be profitable, so we hardly had a valley of death,” he recalls. The setback came with Covid and they took the opportunity to set up an internal infrastructure to efficiently manage collections. That was the germ of Uelzhis current company, winner of the fintech vertical of the South Summit 2023, which helps save technical costs of implementation and maintenance of payment platforms, automating all subscriptions and one-time customer payments in seconds.
This time, the evolution was different. «Our solution was very useful for companies with a high volume of clients, but newborns, without having proven anything, it was difficult to reach them, so we began to operate with small clients, who were the ones that gave us the confidence to implement the product. That was a valley of death, since we did not generate significant income and we had to survive,” he says.
His advice is clear: use financing wisely. «Often you receive the money and think that you are comfortable at the cash level, but without taking into account the activation times, then you start spending more than you should. Suddenly, you have fallen short and have not yet carried out relevant operations to continue raising money. You can get into a critical point from which it is difficult to get out if you do not realize it quickly,” warns about the dangers of making poor decisions in this area. No less important is to take advantage of the opportunities that arise, without losing focus, as well as asking for help because “there will always be people who know more about the industry or who have lived the experiences we are going through.” María Luke was recently recognized in the third edition of the Women Startups Awards in the Early Stage category.
Sale from the beginning
Humberto Matas, Director of Innovation at TeamLabs, thinks that many entrepreneurs “dedicate a great effort to conceptualizing, developing, raising capital and little to facing the market and understanding which parts of their value proposition are more quickly monetizable and will allow them to enter before in positive cash flows. For this reason, he advises “trying to sell from the beginning, even if operations are not yet optimized and the product is not ready.” It is important, he continues, to generate traction with turnover and invest in development, minimizing the cash you burn along the way.
“When the main focus is on raising capital, not to develop a market, but to develop a product, and you leave aside basic management concepts in exchange for the promises of a future paradise, there is a good chance that it will never arrive,” warns the expert. «Many entrepreneurs confuse this with a lack of ambition – he points out – and believe that the bet is going to pay off for them, but they are usually self-deceived. The best way to avoid it is to go out and sell,” he concludes.
A clear vision, with income generation as a priority objective. This is the mentality they support at TeamLabs, as Matas explains: “We train young entrepreneurs whose first obsession is billing because we consider that this is the best real and objective validator of the value you provide. Not all ideas can be monetized from the beginning and complex technology platforms require going through a market adoption phase, but the dangerous thing is to use a model as an excuse to delay generating income while you continue to build and improve a product that is not yet available. validated. Accelerators and investors are key to connecting them with reality, helping them “focus efforts on the aspects with the most possibilities of generating resources in the short term and evaluating with them whether their financial plans are adjusted.”
Tools that startups cling to so that the valley of death does not become their grave.
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