“Valley of death”, in simple terms refers to the difficulty of recovering money in the initial stages of a start-up– before their new product or services starts bringing in revenue from clients. There are, however, some ways to bridge the widening gap of this valley.
A Gompers and Lerner report gives us a scope of this challenge. And it is very real. It reveals that “90% of new ventures that don’t attract investors failing within the first three years”.
Although the first steps of founding a start-up are difficult, there’s even more arduous path ahead, i.e. the way to build an iconic, successful company. Founders and early-stage backers need to be smart and careful about how to position their project for a looming valley of death in between.
Even if there is a growing abundance of capital and investors ready to invest in promising upcoming projects, it is clear from statistics that the volume of deals is decreasing significantly, despite the dollars of investment increasing– a proof of larger checks going to fewer start-ups. Here are some things start-ups need to do to survive the widening valley of death.
A business model that represents your vision
A company needs a chief vision that it wishes to accomplish. While there is a lot of focus given to if a product or a service can create revenue, that revenue must be representative of your big vision. Companies that are funded initially are done out of the expectation that they can make something that can sell.
What needs to be proven, though, is a supposition, that a company can- create value via building a special product or service, which is not too expensive for convincing customers to pay for and that those customers represent the larger market. It must be proven that customers would find it unattractive to switch to inevitable alternatives that may pop up in the market later and that they may willing to buy additional features or product line later on.
Recruit experienced talent
The founding team’s individuals are the ones that convince early investors that they can overcome incredible odds of establishing a company that until now didn’t exist. That they are capable of developing a product that is unique and that they can leverage tools that can satisfy an unmet need.
This talented team also need to symbolize your big vision and prove that they can employ the people that can make you big vision into a reality.
Metrics that Matter
Later-stage investors can see through valuation numbers associated with metrics that are not representative and dismiss them. Therefore, you need to develop a clear understanding of how your business will be measured. Just swamping your investors with stats doesn’t work, you need to present a concise hypothesis that proves your advantages over competitors as evidence to back it.
Figure out your competency by working in a larger market
Many start-ups make the mistake of assuming that if you throw enough money, the business will grow automatically. The truth is though that most business models are simply not suitable for a quick venture growth that is sought after by so many.
In fact, this is one of the biggest reason why start-ups fail after initially raising a considerable amount of venture capital.
Most companies favor business with DIS-economies of scale [the cost advantages that enterprises obtain due to their scale of operation with cost per unit of output decreasing with increasing scale].
This implies dwindling margin with the scale, the reason why so many businesses are small, with fragmented markets (that technology alone cannot amalgamate). So you have to figure out how to improve your unit economics over time (a measure of the profitability of selling one unit of your product or service) and the efficiencies created by economies of scale? etc.
Conclusion: Summing up
Companies seeking success need work, business model, corporate culture and talent that symbolize their big vision. Running a business is not just about creating value, but bringing more value than other companies and figuring out your strengths for going big after you are established.