The valley of death is a risky period for startups, but it is also a test of the founders’ resilience.
Early days at a startup are periods of turbulence and volatility. It can often feel like there are more challenges than there are wins, some failures can prove especially costly, and cash flows can turn into a stressor more than anything else.
This period can be difficult to navigate, more so when the startups enter the infamous valley of death. The valley of death in the startup world is that phase where the company has commenced operations, but is yet to make any money.
At this point, the startup will have found product-market fit and launched its minimum viable product. But even as its product sees market acceptance, it has not yet started generating revenues, and so, its needs to rely entirely on the early funding it has raised until the business, and not just the product, sees success.
Why is the valley of death a problem?
In the startup valley of death, net cash flows dip to dangerously low levels, while at the same time, the startup has just kicked off production and introduced the product to the market. Activities such as prototyping, establishing partners, and payroll have already started to deplete the company’s funds.
Startups at this stage are particularly exposed to failure. The longer they stay in the valley, the higher the chances that they will face a cash crunch. Running out of money is already one of the key reasons that startups fail, and about one in every three startups fail by the second year of operations. For a startup to move out of the valley, it will need to break even.
That the company’s business model hasn’t yet been proven makes the problem worse. Investors may decide to pull back, and step away from providing critical capital assistance that may get the company through the valley.
Further, the valley of death can occur multiple times depending on the industry. One climate tech fund notes that for climate tech startups, there are as many as four valleys of death: at the startup formation, product development, market validation, and track record establishment stages.
How to overcome the valley of death?
Emerging out of the valley is all about finding a way to bridge the gap between early proof of concept and market feasibility, and break even.
The most basic precaution is to budget carefully, and account for an emergency cash fund. While it is helpful to have angel and seed investors, it is likely that the founders are running the company mostly on their personal funds. It’s a good idea to set some of this amount aside for a rainy day in the valley.
Aside from bootstrapping, founders can tap into other avenues as a means of raising capital that can bridge them across the valley. This includes crowdfunding, grants, debt, or incubator programs. If the startup has already raised some funds and is backed by credible investors, raising a bridge round is also a possibility, although founders will have to make some room on the cap table to accommodate the investment.
Further, one VC suggests that there are non-capital related ways to survive the valley too. This involves building a business model that can demonstrate massive and cost-effective growth potential, having the right early talent that can meet the expectations of an ambitious startup vision, determining a distinct competitive advantage clearly expressed in metrics, and understanding how to best use funding to improve unit economics and reap economic efficiency from scale.
The valley of death can be a period of great pressure for founders. In many ways, it is also a test of their abilities to navigate risks in business, show leadership, and prove their ability to run a company successfully. If anything, what the valley of death points towards, is that it’s not enough to simply have a great product to see success in the early days. Funding and management strategies matter just as much.