Valley of death of a new company

Accelerate your business with these expert tips "Valley of death of a startup". Analyse and discover this TIP!
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VALLE DE LA MUERTE DE UNA NUEVA EMPRESA (Death Valley)

Accelerate your business with these expert tips "Valley of death of a startup". Analyse and discover this TIP!

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Valley of death of a new company

The valley of death is the critical phase that many new businesses go through. It refers to a period when a company has significant expenses but has not yet generated enough revenue to cover its costs and stay afloat. At this stage, the company often needs capital to finance the research, development and launch of its product or service.  The valley of death can be particularly difficult for start-ups that require significant investment to develop and launch their product or service. If a company cannot obtain the necessary financing to survive this phase, it can lead to the failure of the company.

To overcome the valley of death, companies can resort to a variety of strategies, such as seeking funding from angel investors or venture capitalists, cutting costs or looking for alternative sources of finance. In short, the valley of death is a critical phase faced by many new businesses where they need funding to continue operating, but have not yet generated enough revenue to cover their costs. Overcoming the valley of death can be key to the long-term success of a business.

Many businesses fail for lack of liquidity during the valley of death

Many businesses fail due to lack of liquidity during the valley of death. This critical phase in the life of a company is often requires significant investments in research, development and launch of a product or service, which can result in significant costs without corresponding revenues. At this stage, the company may need external financing to continue operating. If they are unable to raise sufficient capital to cover their expenses, they may be forced to close down or seek reorganisation. Lack of liquidity can also hamper the company's ability to pay employees and maintain day-to-day operations. This can lead to a reduction in employee morale and, in turn, a decrease in the quality of work performed.

It is important for companies to plan and prepare for the valley of death, and to consider all available financing options, such as venture capital, crowdfunding and debt financing. In addition, companies can reduce costs and increase efficiency to help improve their liquidity during this critical phase. Lack of liquidity during the valley of death can lead to business failure. It is important for companies to plan and prepare for this critical phase, and to consider all available financing options to improve their liquidity and increase their chances of long-term success.

Solutions to overcome the valley of death

The valley of death is a critical phase in the life of a company where lack of liquidity can lead to failure.

The following are some solutions that can help companies to overcome this phase:

  1. Seeking investors: companies can look for investors who are interested in financing their idea. This may include angel investors, venture capitalists or even private investors.
  2. Obtain funding from government grants: Many governments offer grants and loans to early-stage companies. These grants can help fund research and product development.
  3. Participate in acceleration programmes: Accelerator programmes are a good option for early-stage companies seeking funding and expert advice. These programmes are usually time-bound and offer funding and mentoring in exchange for a stake in the company.
  4. Reduce costs: One way to improve liquidity is to reduce the company's costs. This may include cutting unnecessary expenses and improving the efficiency of processes.
  5. Seek alternative sources of income: companies may consider diversifying their product or service offerings to generate new sources of revenue.

To overcome the valley of death, businesses should seek funding from investors, obtain government grants, participate in accelerator programmes, reduce costs and seek alternative sources of revenue. It is important that companies prepare and plan carefully for this critical phase to increase their chances of long-term success.

How many months can the valley of death last?

How long the valley of death can last depends on a number of factors, such as the type of company, the market, competition and available sources of finance. In general, the valley of death, is often more pronounced in companies that need a large amount of capital to develop and launch a product or service on the market. In these cases, the valley of death can last for several years until the company is able to earn enough revenue to cover its costs and reach profitability. On the other hand, If the company has a stable and solid source of funding, such as an investor or a parent company, the valley of death may be less pronounced and last for a shorter period of time. In general, se recommend that start-ups have sufficient capital to cover their expenses for at least 12 to 18 months, in order to survive long enough to achieve product-market fit and reach profitability.

The valley of death is the period of time in which your new company has liquidity issuescash flow stress because it consumes more resources than it produces and you are not able to raise the necessary finance. The worst moment for entrepreneurs is when they run out of liquid cash in the bank and cash desk.They run out of financial resources to continue their business and getting them is not easy. The valley of every death depends on how fast you grow your sales, it is usually 12-24 months, from the time you set up your business until you manage to cover, i.e. pay, all your expenses. (fixed and variable) and recover the investment made to start up your project. 

It is so called because many start-ups fail in the middle of the valley of death. (see+) due to a lack of liquidity ("thirst") during these months. It is very clear in your cash flow forecast. (see TIP), as long as you do not put in any financing, these are all the months in which your cash balance, banks (your liquidity) is negative. The moment of maximum stress occurs in the month before you reach your break-even point (ver+). The final option may be to look for a new partner to inject money into the company. business angel (ver+). If you wait until you're at your worst point in the valley of death, it's very difficult to get funding, you have to anticipate and start selling more and seek financing before the valley arrives. More than a place, is a point in time in the entrepreneurial process when, if not acted upon appropriately, businesses fail and close down.

Several factors can lead to the valley of death

The main ones are financial, but these are also associated with aspects commercial LACK OF SALES!!! and, operatives overspending!!! which was not corrected in time. The entrepreneur enters this phase when his sources of financing have dried up and sales are not sufficient to cover his expenses, i.e. when has not been achieved break-even point (ver+). It is common for the entrepreneur to think that at some point operating income will fund growth, but the reality is that if the business is successful, the demand for resources will be greater than the net profits it is generating. At that point, the entrepreneur has to make strategic decisions that can change or maintain the objective proposed with the creation of the company.

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Jaime Cavero

Jaime Cavero

Presidente de la Aceleradora mentorDay. Inversor en startups e impulsor de nuevas empresas a través de Dyrecto, DreaperB1 y mentorDay.
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