In the language of investors and entrepreneurs, a “valley of death” is a period when a startup hasn’t yet reached payback. It means that the first investments are made, the product is launched, but operating costs exceed the possibilities and profit. In such a situation, most projects can’t live to see the market reaction and die.
Let’s see what prevents ambitious companies from staying afloat. Here’s our short guide on how to crawl out of the notorious valley of death.
What is a startup valley of death?
Most young projects are not familiar with the strategy of survival in an uncertain startup environment. There are many factors leading to a company’s failure to reach self-sufficiency: overestimation of its strengths and a product’s significance for the market; underestimation of risks; lack of resources (money, time, knowledge); competition; blind decisions, etc.
Valley of death is a part of a startup’s life cycle when the MVP is already launched, but sales do not cover operating costs. At the same time, getting new investments requires a working business model. The inflow of cash slows down or stops, and the initial capital is already exhausted. As a result, a company is on the verge of survival.
It’s not easy to get out of the valley of death. Today, it’s even more difficult for a project to grow. Despite an impressive global venture capital that amounted to $288 billion in the first half of 2021, seed-stage investment only totals $6 billion. In Europe, the declining numbers of pre-seed rounds are maintained since 2016. Investors tend to favor late-stage companies or those that have already proven: their business model works.
However, it is quite possible to get out of the valley of death. In fact, it’s one of the natural stages in a startup’s development which begins with receiving investments (or investing your hard-earned money) and ends with a breakeven.
5 common reasons behind startups’ death
There are a lot of reasons that prevent young companies from breaking out of the valley of death. A project’s failure does not always mean it offers a bad idea or an unnecessary product to the market. Quite often, other factors are to blame, such as the uncertainty of the environment or the ill-conceived strategy. Let’s take a closer look at why, after receiving the first funding, startups fail to reach the next stage, lose their focus, and die.
Failed product-market fit
The problem arises both from insufficient product-market fit and from an incorrect go-to-market strategy. You can create a revolutionary product, but if there is no demand for it, then it’s doomed. But even a high-demand offer with great PMF needs smart marketing to win. Reliable GTM strategy and implemented CustDev significantly reduce the risks of launching a product that customers don’t need.
At the start, problems are often caused by unaddressed feedback. A startup’s mistake might be hiding both in lack of communication with a target audience, incorrect feedback processing, and/or drawing incorrect conclusions. As a result, a team creates a product that is in low demand or only caters to a small user group.
Another problem is insufficient hypothesis testing. At the start, it’s important to test as many options as possible without focusing on any of them. The list of hypotheses should be constantly updated so that if one thing doesn't work, you can try another.
Problems with product-market fit also include causing bad customer experience due to the lack of CX design. A company can create a popular product that solves consumers’ problems but loses its audience because of a complex interface or inconvenient systems. For example, if a service has got a complex identification process, a user might find it easier to just go to a competitor instead of filling out a huge form with too many fields. Turns out, a product’s potential gets blocked by its low-quality implementation.
Another reason for a probable collapse is a lack of expertise, i.e. founders trying to build a business they have no understanding of. Their pitch might be effective, they can even attract investments, but their success in implementing a project is questionable, especially when it requires deep industry knowledge.
An example of a failed product-market fit is the resounding failure of Katerra, a construction startup founded by experienced managers (Michael Marks, Fritz Wolff). Due to ambitious announcements, the project managed to attract more than $2 billion. However, the founders had a lot of experience with technology, but not with the construction industry, so the announced revolution did not succeed. In June 2021, the company went bankrupt.
Lack of funding
The second key reason for startup failure is a lack of funds. Funding rounds rarely meet the real startup needs in terms of finances and time.
Without attracting sufficient investments, rapid growth is impossible. At the very start, you can get by with your own funds or a bank loan. But as your project develops, much more significant money injections are required to scale it up, enter large markets, and develop new things. It’s not always possible for startups to impress investors with a working MVP or a business model enough that they provide the required amount of funding. As a result, a startup lingers on the verge of survival.
For example, the aviation technology company Aerion Corporation failed to convince investors of its own potential, despite partnerships with Boeing, General Electric, and NetJets. In total, the startup managed to raise $1 million, but it was not enough to implement a large-scale project. At the end of May 2021, the company was closed.
Improper use of the funds can be another reason for failure. Having received millions of dollars, the founders rush to hire more staff, diversify the product, and conquer new markets. As a result, expenses are growing rapidly and disproportionately, making funds run out.
A great example is DAQRI, an augmented reality technology company. The startup shut down after spending the $250 million it got from investors and failing to raise a new round.
Issues with the team
For a startup, the next most important thing after idea and funding is its team. It’s fundamental to find good professionals who are passionate about a startup’s idea and can ensure its rapid development from the very start. But when a company has no name or lacks funding, it is especially difficult to attract high-level professionals.
When hiring a team, it’s important to explain the current situation to candidates as honestly as you can, highlighting startup specifics: risk of failure, high workload, etc. For example, in a young company, the responsibilities of employees are often mixed. When necessary, one person might be covering for an entire department (which will be hired much later). You can lure in a professional not only with current earnings but with future results as well. For example, their salary might include a percentage of sales. They might be granted rights to an innovation, shares, options, etc.
An incompetent team without ambition and faith will most likely make your startup collapse. For example, Fieldbook — a CRM database for sales management — experienced problems with hiring employees, which later caused its unfortunate demise.
From the very start, founders must determine not only the value of their product for the consumer but also its advantages that outperform its competitors. Of course, there is no need in being completely and utterly unique. Most ideas are derived from existing market offers. But it’s important to improve the product instead of copying it, providing customers with the best option.
An example would be the startup Reach Robotics. Renowned robot maker MekaMon admitted the closure was due to difficult business conditions in the highly competitive market of B2C electronics.
Unwillingness to pivot and/or unsuccessful concept change
If the idea failed to take off and the product didn’t prove itself, then founders have to choose between giving up or trying to pivot. Sometimes even a small direction change can help a startup crawl out of the “valley of death.”
Many brands went through a pivot, changing their fate for the better. Examples include YouTube, originally created as a dating platform, and PayPal, which transferred IOUs between smartphones in the beginning. Netflix changed its concept twice: first as a mail-order DVD rental service, then a streaming service. In 2013, the startup decided to create its own content, eventually becoming a global brand in this field.
However, a pivot is a serious and risky step that requires a balanced approach. The adoption of a new concept should be accompanied by research, calculations, and proof that the chosen strategy is correct. Pivots often end in failure. An example is Inboard Technology — its unfortunate turn made the startup collapse. The company was selling electric skateboards but decided to start releasing electric scooters. Nevertheless, the amount of funding was not enough to implement the new concept. After investors refused to invest additional funds, it was forced to close.
Signs of impending failure
Founders do not always realize that a project has reached a crisis point and it’s time to take action. Here are some warning signs of impending death.
- Business strategy does not allow enough space for development and/or market expansion. There are no ways to keep the customer inflow stable.
- Key metrics show disappointing results (MRR, gross profit, LTV, churn rate, CAC, and so on). At the initial stages, it’s important to evaluate the product, its relevance to the market, its production & customer acquisition costs. You need to understand your pricing: what affects the end cost, how you can reduce it, and other factors.
- Burnout, critical disagreements in the team, confusion of the founders. Lack of understanding of where to go next. Losing motivation and faith in the product.
Each startup is unique and requires a comprehensive assessment before deciding on further actions. When the prospects are vague, performance indicators are not encouraging, development has reached a dead end, and/or a team’s motivation is at an all-time low, it means you need to revise your product, market, and strategy. It might be necessary to make adjustments or even pivot. In the worst case, the best option is abandoning an idea for good, since the earlier you do it, the less you lose (especially if there are no significant debts to employees, contractors, etc).
How to survive the startup valley of death
The valley of death is only one of the crisis stages. In the future, there are other stages awaiting a company, perhaps even larger ones. This is the startup philosophy. Having passed this stress test at the beginning, the founders will be ready to continue on their journey
So, to help you overcome the valley of death, we wrote some general recommendations. Don’t forget to tweak them according to your startup’s specifics.
- Test the idea, explore the market and your consumer. At the start, there should always be a clear plan and/or direction (otherwise you won’t succeed with funding). In the future, your plan will most likely change, but it’s a normal thing for startups.
- Take the time and assemble a team that will go through hell and high water for you. Don’t forget to delegate authority. No one has yet gone through the valley of death alone.
- Track key performance metrics. Draw up a financial plan. Review operating costs. A detailed expenditure gives you an idea of main expenses: rent, payroll, taxes, equipment, and so on.
- Once you receive funding, draw up a plan of what you will spend it on. It should be appropriate and justified.
- Be careful about signing contracts and other documents. Pay attention to sanctions for non-fulfilled obligations and violated deadlines. Always assess your risks.
- Look for investors who are aware of a startup’s potential and can provide not only financial but other types of assistance as well (such as consulting, infrastructure, etc.)
The last point is extremely important for beginners. Startup studios, incubators, and accelerators provide their own resources in addition to funding in order to help projects grow. For example, they can offer additional personnel (accountants, lawyers, programmers), education, office space, equipment, and so on. This way, founders can develop their projects without being distracted.
This eliminates the problem of a classic venture investment when a large investor is isolated from a founder. Although a startup studio develops fewer projects than a fund, this way, each project receives much more personal attention.
The way of overcoming the valley of death depends on a startup’s specifics, potential, and prospects. In the event of a crisis, founders can sell their product to a well-known brand, agree to acquisition by a large corporation, or change their concept altogether, hoping to pivot. In any case, each step must be weighed and approved by a startup’s team.