Mexico City — Denis Yris, CEO of the WORTEV accelerator and equity fund, has experienced firsthand what it is like to go through the ‘valley of death’ with one of his ventures. Ten years ago, he started his first artificial intelligence project, but raising capital was his biggest obstacle.
“I was approached for funding and everyone kept asking us for more and more results,” Yris recalls. And the necessary capital never came in time to survive that ‘valley of death’, a concept coined in business schools to describe the moment when entrepreneurs run out of funding to continue their businesses.
With no money even for basic expenses, Yris decided to pivot the business model at the suggestion of his partner Isabel Guízar. It was then that they changed from an artificial intelligence startup to a business intelligence startup for small and medium-sized enterprises (SMEs), providing them with data to improve decision making and thus prevent them from going bankrupt.
This evolved into a business accelerator, which not only provides consulting services to entrepreneurs but goes beyond that, by reviewing the operational core with a specialized and multidisciplinary team to help entrepreneurs so that they can focus on the development and commercialization of their product or service, Yris said in an interview with Bloomberg Línea.
The main reasons why a startup does not survive the ‘valley of death’ are financial, but they are also associated with commercial and operational aspects that were not corrected in time, Yris says.
How to Overcome the ‘Valley of Death’
The main solution to overcome that moment in the initial stage of a startup is to raise capital from angel investors and equity funds. “When you receive an investment from entrepreneurial capital, you are reducing your risk rate by a lot,” says Yris.
Figures show that in Mexico only 35% of ventures survive the first five years, but those with equity capital have a survival rate of more than 80%, according to the Mexican Private Equity Association (AMEXCAP).
The figures are alarming, says Yris. That is why the entrepreneur and investor created the nuclear accelerator concept, in which WORTEV gets involved in the core of the company to help them grow, and not only that, it also gives the startup seed capital.
In addition to the business accelerator, in 2018, Yris opened an entrepreneurial capital fund for individual investors, unlike other funds that are only open to institutional investors, with the goal of starting to support startups that do not fall under the investment thesis of other venture capital funds.
“Our investment thesis is aimed at technological innovation projects, but we also aim for traditional projects such as consumption, agribusiness, tourism and social impact projects because the entrepreneurial space is just maturing, and we cannot leave traditional projects aside,” Yris explains.
In fact, 80% of WORTEV’s portfolio is made up of traditional projects, but which incorporate innovation within their model. For example, IMITI, a project of event venues that focused on a niche market, also organizes nightclub-type events and their business model includes the financing of events, which helped them to have recurring income during the pandemic.
Thanks to the nuclear business accelerator they have built, WORTEV has identified and understood what are the main points of failure of startups. Yris shares three key aspects to take into account to survive the dreaded ‘valley of death’ for early stage startups.
“In many cases, an entrepreneur starts to sell, but does not visualize, does not plan, does not understand the industry or the competition, and that really starts to become a problem,” Yris explains.
Having a financial and operational plan will allow the entrepreneur to give direction to the company and grow in an orderly manner.
2. Hiring Human Capital
It is important to build a team that complements the experience and skills of the startup founder. A startup with an experienced team behind it is attractive to investors. “At WORTEV, we invest in teams, not just in one person”, Yris says.
The job market is competitive, especially in technology-related positions. But, “when you are an entrepreneur and you don’t have capitalization, then you offer salaries that are not so high, but you also offer training. The problem is that the employee you train ends up going to another company”, he says. The lack of commitment from employees is also a problem, he adds.
3. Market Traction
Sometimes one of the biggest problems is poor market traction, Yris says. By not having a direct focus on what the potential customer looks like, entrepreneurs waste part of their budget on trying to attract that market.
Yris explains that often an entrepreneur wastes time and does not focus on the most important thing, which is selling.
“The entrepreneur who does not know how to sell, does not know how to start a business,” he says.
These operational problems, together with the lack of capital, lead startups to languish in the valley of death. That is why it is important to have investors who are willing to invest smart money, that is, money accompanied by the investor’s knowledge and experience that can help startups grow and take them to the next stage.
And that is what WORTEV is looking for, he says.
“What we want to do is to take the projects to venture capital so that what happened to us, of not having results, does not happen to them,” he adds, and urges investors to change the culture of fear of risk, and individual investors to support entrepreneurs.
WORTEV’s goal for 2022 is to close the year with the acceleration and investment of 100 early-stage projects.