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Valley of Death – Startup Survival Strategy

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Valley of Death – Startup Survival Strategy

StrategiNext

“Valley of death” is what investors and entrepreneurs call the dead end of a startup’s life, when the first investments are made, the product is launched, but there is no profit yet, and operating costs exceed the possibilities. It is at this time that most projects fail to survive in an aggressive environment – they die without waiting for a market response.

We understand what prevents ambitious companies from staying afloat and how to overcome this notorious “valley of death”.

The concept of “valley of death” in startups

Most young projects are not familiar with the strategy of survival in an uncertain start-up environment. Overestimation of one’s own strengths, the significance of the product for the market, underestimation of risks, lack or lack of resources (money, time, knowledge), competition and the blind path lead to the fact that the company does not live up to self-sufficiency.

Death Valley is a period in a startup’s life cycle when the MVP is already launched, but sales do not cover operating costs, and getting new investments requires a working business model. The inflow of investments slows down or stops, the initial capital is exhausted – as a result, the company is on the verge of survival. 

It is not easy to get out of the “valley of death”, in modern realities it is even more difficult for a project to grow. Despite an impressive amount of global venture investment , which amounted to $288 billion in the first half of 2021, investments at the seed stage amount to only $6 billion. In Europe , the downward trend in the number of pre-seed rounds has continued since 2016. Investors prefer late-stage companies or those that have already proven that the business model works.

However, it is quite possible to overcome the “valley of death”: in fact, this is one of the natural stages in the development of a startup, which begins from the moment of receiving investments (or investing your hard-earned money) and ends with going to zero. 

Why Startups Can’t Get Over the Valley of Death: 5 Common Reasons

There are a lot of reasons that prevent young companies from escaping from the “valley of death”. The failure of a project does not always mean that it offers the market a bad idea, an unnecessary product – often the uncertainty of the environment, the ill-conceived strategy, and other factors are to blame. Let’s take a closer look at why startups, having received the first funding, cannot rise to the next stage, lose focus and fail.

Product to market mismatch

The problem arises both due to insufficient product-market fit and due to an incorrect go-to-market strategy (entering the market). You can create a revolutionary product, but if there is no demand for it, the project is doomed. But even a sought-after high PMF offer needs smart marketing to win the market. Reliable planning of GTM, implementation of the CustDev methodology significantly reduces the risks of withdrawing a product that is unnecessary to the consumer.

Often at the start, problems arise due to undeveloped feedback. The mistake of startups can be both in the lack of communication with the target audience, and in the incorrect processing of feedback, incorrect conclusions from it. As a result, the team creates a product that is not in demand on the market or is needed only by a narrow circle of users.

Another problem is insufficient hypothesis testing, MVP. At the start, it is important to test as many options as possible, without focusing on one or two ideas. The list of hypotheses should be constantly updated, one thing did not work – we try another, and so on.

This can also include the failure of a startup due to the formation of a bad customer experience due to the lack of customer experience design. A company can create a popular product that solves the problem of consumers, but lose them because of a complex interface, an inconvenient interaction system. For example, the service contains such a complex identification system that it is easier for the user to go to a competitor than to fill out a form with many fields. It turns out that the essence of the product is blocked by its unsuccessful implementation.

The reason for the collapse can also be the lack of expertise, when startups are trying to build a business about which they have a very vague idea. They are able to conduct an effective pitch, attract investments, but whether they will be able to successfully implement a project that requires deep knowledge in the chosen industry is a big question.

An example of this is the resounding failure of the construction startup Katerra, founded by experienced and successful managers (Michael Marks, Fritz Wolf). Due to ambitious announcements, the project managed to attract investments in the amount of more than $2 billion. The problem is that the organizers had a lot of experience in the field of technology, but not in the construction industry, so the revolution they announced did not succeed. In June 2021, the company declared itself bankrupt.

Lack of funding

The second key reason for the failure of a startup is the lack of funds. Funding rounds rarely meet the real needs of a start-up company, both in terms of amount and time.

Without attracting a sufficient amount of investments, the rapid growth necessary for a startup is impossible. If at the very start you can still get by with your own funds or a bank loan, then as the project develops, to scale it up, enter large markets, and new developments, much more significant injections are required. It is not always possible for companies to demonstrate to investors a working MVP, business model and receive the required amount of funding. As a result, the startup is on the verge of survival.

For example, the aviation technology company Aerion Corporation failed to convince investors of its own potential, despite partnerships with giants Boeing, General Electric, NetJets. In total, the startup managed to raise $1 million, which was not enough to implement a large-scale project. At the end of May 2021, the company announced its closure.

The reason for the failure can also be the improper use of the funds received. Having received millions of dollars, the founders rush to increase their staff, unreasonably diversify the product, conquer new markets. As a result, expenses are growing rapidly and disproportionately to income, and funds are running out.

An example is DAQRI , an augmented reality technology company. The startup shut down after spending the $250 million it raised and failing to raise a new round from investors.

Problems with the team

The next most important point after choosing an idea and finding a source of funding for a startup is the selection of a team. It is fundamentally important for a startup to find good specialists who are passionate about the idea and capable of ensuring rapid growth and development of the project from the very start. The problem is that a company that does not have a name or a sufficient budget at the start of the journey finds it especially difficult to attract high-level professionals.

Initially, when selecting a team, it is important to honestly indicate to candidates the current situation, taking into account the specifics of a startup: the possibility of failure, high workload, and so on. For example, in a young company, the responsibilities of employees are often mixed: a person, if necessary, does the work for himself and for “that guy”, who will be hired much later. You can attract a professional not only with current earnings, but also with a future result – a high percentage of sales, granting rights to an innovation being developed, shares in a business, options, and so on.

An incompetent team without ambition and faith in the idea will most likely lead the startup to collapse. For example, problems with hiring employees caused the failure of the startup Fieldbook – a service in the form of a CRM system and a database for managing sales.

High competition

Already at the start, founders must determine not only the value of their product for the consumer, but also its advantages, allowing them to outperform competitors. Of course, there is no need to strive for complete uniqueness. Most ideas are derived from existing market offerings, but it is important not to copy the product, but to improve it, providing the client with the best option.

An example of a failure in a highly competitive environment is the robotics startup Reach Robotics . Renowned interactive robot maker MekaMon admitted the closure was due to difficult business conditions in the highly competitive consumer electronics market.

Unwillingness to pivot or an unsuccessful change of concept

If the idea “didn’t take off”, the product didn’t sufficiently prove its need for the market, the founders have a choice – to give up or go to the pivot . Sometimes even a small change in course can help a startup overcome the “valley of death.”

Many brands went through the pivot, changing the fate of the company for the better. Examples include YouTube, which was originally created as a dating portal, or PayPal, which at the start was engaged in the transfer of IOUs between smartphones. And Netflix changed the concept twice: first as a mail-order DVD rental service, then changed direction to launch a streaming service. In 2013, the startup decided to create its own content, eventually becoming a global brand in this area.

But the pivot is a very serious and risky step that requires a balanced approach. The adoption of a new concept should be accompanied by research, calculations, and proof of the correctness of the strategy. Pivots often end in failure. An example is the startup Inboard Technology , whose unfortunate turn led to the collapse. The company was engaged in sales of electric skateboards, but decided on a pivot – the release of electric scooters. The current amount of funding was not enough to implement the new concept. After investors refused to invest additional funds in the development of a startup, he was forced to close.

Signs of coming failure

Founders do not always realize that the project has reached a crisis point and it is time to take action. Warning signs of a coming crash may include:

  1. The strategy does not provide sufficient development, market conquest, there are no ways to constantly attract customers.
  2. Key metrics show disappointing results – MRR, Gross Profit, LTV, customer churn rate, customer acquisition cost, and so on. If income falls or is absent, Gross Profit is negative, the outflow is over 5%, you need to take action. At the initial stages, it is important to evaluate the product, its relevance to the market, production costs and customer acquisition. It is important to understand your pricing – what affects the cost, how to reduce it, and other factors.
  3. Burnout, critical disagreements in the team, confusion of the founders, lack of understanding of where to go next, loss of motivation and faith in the product.

Each startup is specific and requires an objective comprehensive assessment before deciding on further actions. When the prospects of the project are vague, performance indicators are not encouraging, development has reached a dead end, the team’s motivation is reduced, first of all, a re-analysis of the product, market, and revision of the strategy is necessary. Founders will need to make adjustments to the original plan, go for a pivot, and in the worst case, abandon the idea with the least losses (when there are no significant debts to employees, contractors, and so on).

How to get through the “valley of death” and stay alive

“Valley of Death” is only one of the crisis stages; in the future, others, sometimes larger ones, are waiting for the company. This is the startup philosophy. Having passed this kind of stress test at the beginning of the journey, the founders will be ready to move on.

So, to overcome the “valley of death”, be guided by general recommendations and take into account the specifics of your own startup:

  1. Check the idea, explore the market and your consumer. At the start, there should always be a clear plan and direction of movement (otherwise it will not be possible to get funding). In the future, the plan is likely to change – this is the norm in startup ideology.
  2. Take the time and assemble a team with which “both in fire and in water.” Delegate authority, no one has yet gone through the “valley of death” alone.
  3. Track key performance metrics, draw up a financial plan, review operating costs. The detailed expenditure part gives an idea of ​​the main expenses: for rent, payroll + taxes, equipment, and so on.
  4. Once you receive funding, plan your spending: it must be appropriate and justified.
  5. Carefully approach the signing of contracts and other documents, pay attention to sanctions for non-fulfillment of obligations, violation of deadlines, and assess risks.
  6. Look for investors who are aware of the potential of a startup, who can provide not only financial assistance, but also other support: consulting, organizational, and so on.

The last point is extremely important for beginner projects. Startup studios, business incubators, accelerators, in addition to funding, provide their own resources for the development of projects: personnel (assistance of an accountant, lawyer, programmer), educational, property (equipment, offices) and so on. The founders can develop the project without being distracted by related issues.

This eliminates the problem of classic venture capital investment – isolation of a large investor from a founder. The startup studio approach involves developing fewer projects than foundations, but each of them receives much more attention.

The way to overcome the “valley of death” depends on the specifics of the startup, its potential and prospects. Founders in the event of a crisis may well sell the product to a well-known brand or agree to a takeover by a large corporation. Or change the concept and make a pivot. In any case, each step must be weighed, considered and approved by the team.

Source | StrategiNext

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