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All new businesses experience the valley of death — the time after a startup’s development but before the company begins making a profit. Many companies meet their downfall during this period, never escaping the dreaded startup curve. In the U.S. alone, 90 percent of startups ultimately failed in 2019, with only half staying in business for five years.
Some of the top reasons startups fail include:
- Running out of money: Failing to profit is the top reason startups flounder. Many companies rely on investors to cover startup costs before they start earning enough revenue to sustain themselves. A startup can run out of money for many reasons, including inadequate financial planning or the inability to attract outside financing.
- No market need: Before marketing a product or service, you’ll need to identify your target demographic. Many startups fail because they market their product to everyone rather than the people who need it most. Startups that discover and establish a market niche are much more likely to have successful campaigns and attract customers before competitors.
- Poor business models: Some people choose to establish a startup because they have a passion or believe they’re more skilled in an area than their peers. However, many of these new entrepreneurs lack business expertise and experience. Therefore, many startups struggle to implement a solid business model.
- Incorrect teams: Although founders are typically blamed for startup failure, multiple stakeholders can contribute to the death of a new company — including employees, strategic partners, and investors. A strong business plan can help partners work together, but finding the right fit for every position is essential.
What is the startup valley of death?
The startup valley of death refers to when a company has started operating but not begun making revenue, only depending on investments to stay in business. Companies may struggle to attract investors and other stakeholders because they are still developing their business models. A company that remains in the startup curve longer is more likely to fail due to a higher burn rate.
Startups in different industries experience the valley of death for varying lengths of time or even multiple times. For example, while many startups may experience one near-death moment, climate tech companies confront the valley of death four times — during formation, the product development phase, the market validation stage, and when establishing a reputation of reliability. Ultimately, how a company experiences the startup valley of death depends on its industry and business plan.
The death valley curve on every startup’s journey
Although every startup experiences the death valley curve differently and potentially at multiple milestones, the curve still follows a similar pattern. Many inexperienced startup founders imagine positive linear growth. However, entrepreneur Howard Love, founder of digital media company LovetoKnow, describes the startup valley of death as a J-curve.
Love details six steps in the startup J-curve:
- Create: The founders are inspired and excited about their new product or service during the first stage. Unbridled enthusiasm is typical at the start of a company’s life. However, founders should ground themselves by exploring the market need for their idea, building a solid team, and attracting investors.
- Release: As a startup founder, you may feel attached to your original idea. However, the first version of a product or service often fails. You should view your idea as a hypothesis to improve upon based on market needs. Although you may experience psychological and physical blocks when exposing your product to market, it’s best to release your product and gather feedback.
- Morph: The morph phase is where you transform your company to better fit the market need by changing your product, target market, or business strategy based on feedback. A product or service may have to go through multiple morphs. However, customer traction should suggest each new iteration has improved — despite any preliminary flaws.
- Model: Once you’ve improved your product to serve a market need, you’ll have to refine your business model to support sustainable growth and begin making a profit. Like developing the perfect product, creating a strong business model requires generating a hypothesis, testing your idea, and analyzing feedback to improve. Typically, solid business models have high margins, low friction, and a network effect. Models should also be repeatable and scalable.
- Scale: Startups that have established a useful product and profitable business model will start to grow. You’ll need to scale your startup accordingly. Find expert team members, implement new company processes and procedures, reevaluate your budget, and create effective marketing campaigns.
- Harvest: The harvest phase is when companies begin to reap the benefits from their efforts. The startup is now transforming into an established company. Once your company has reached maturity, consider your plan for future growth, how to compensate investors, and where to invest excess cash.
Shaping your startup’s product and market fit
Product-market fit often determines whether a startup is successful. Before establishing and growing your company, you must verify a market exists for your product or services by identifying target customers. Your products or services must fulfill a real market need, and your company must provide a good user experience.
The best markets pull the product out of a startup, as the company has conducted extensive market research to ensure its product fulfills a customer’s needs. When you have a good product-market fit, your startup will grow as customers and press provide testimonials and you convert more leads.
You can take the following steps to achieve the right product-market fit:
- Conduct market research: Research will help you ensure there’s a market for your product. Interviews with customers are one of the best strategies to identify where your product can better fit its target market. Ask customers about their backgrounds, what problem they’re using your products or services to solve, how they use your products, and how they heard about your company. You can also conduct secondary research by analyzing market information like census data or conducting controlled product testing.
- Attract funding: Many investors, especially venture capitalists, require proof you’ve achieved product-market fit. Use your market research and define your company story before crafting your pitch for venture capitalists. Rather than focusing on your product or service’s features, explain your company vision and the size of your target market. Ensure you have a solid understanding of your quarterly monthly financial projections, as venture capitalists care about whether they’ll get a return on their investments.
- Analyze product-market fit: After conducting initial research and attracting funding, you’ll want to reach out to your customers again to survey whether you’ve achieved product-market fit. Analyze qualitative and quantitative measures to demonstrate your product’s fit in a particular market. Quantitative factors include churn rate and market share. Customer word of mouth, testimonials, and media coverage are qualitative indicators you can share with investors.
As you evolve your company based on feedback, continue to conduct assessments to ensure your products still fit changing markets.
Building an investment foundation for a startup
Investors are fundamental to keeping startups in business during the death valley curve when companies are still awaiting profit. You should seek funding for your startup from multiple sources to maximize your company’s financial security.
It’s important to be open and honest with investors about your ideas. While your company can maintain some secrecy to protect itself in a competitive market, investors want to know that your product is beyond what any other business can offer. That said, you must be cautious to avoid overpromising your product’s profitability. The key is to establish investor relationships based on communication and transparency.
Your investment foundation might include:
- Seeking government and organization-based funding: Startups can receive non-dilutive funding from the government and other organizations. This type of funding allows stakeholders to keep their share of the company during fundraising. Some governments offer grants for small companies, while other private organizations exist to support startups. Companies like Startup Grind and the Founder Institute help thousands of global entrepreneurs with financial support, advice, and international conferences.
- Working with angel investors: An angel investor, also called a private investor, is an individual with extra funds who supports startups during their early stages in exchange for ownership equity. Rather than investing in a particular business concept, an angel investor usually invests in a specific entrepreneur. They typically have the goal of helping startups get established rather than making a profit. Angel investors often have a mission to invest in what they’re passionate about.
- Crowdfunding: Online investment platforms are a modern crowdfunding solution introduced as part of the Spotlight on Jumpstart Our Business Startups (JOBS) Act of 2012. These fundraising websites allow startups to make a single pitch rather than repeatedly meeting with multiple investors. Sometimes, crowdsourcing platforms are even industry-specific, helping you attract the best investors.
- Partnering with an incubator firm: Working with an incubator firm is a secure way to grow your startup. Incubators are organizations that supply resources to support startup development. These organizations provide services like financial help, including initial funding and access to investors, and physical resources such as office space, mentorship, and administrative functions.
- Planning for the future: Regardless of your industry, it’s generally best to raise more money than budgeted. Markets are constantly evolving, and the future can be unpredictable. You’ll want to ensure your company has raised enough funds to cushion potential fallbacks during the death valley curve.
Tips for startups overcoming death valley
The best way to push through the startup valley of death is to invest in your company’s development while maintaining a solid budget. You can focus on a few key areas.
1. Embrace Technology
Technology is instrumental in making your business more efficient. You can automate many processes rather than manually handling onboarding, payroll, and other business operations. Companies can analyze data to identify where technological solutions can help them streamline operations to survive the startup valley of death.
Keeping up to date with the latest technological innovations can benefit your startup in multiple ways, including:
- Better workforce management: Technology like Google Workspace helps startups stay organized without dealing with filing cabinets of paper documents. Technology has also automated many business processes like scheduling, marketing, service appointment bookings, and sales. Artificial Intelligence (AI) technologies can perform many time-saving tasks, like automatically transcribing meeting notes and tracking employee productivity.
- The possibility of remote work: People working from home — especially those equipped with the right technology — are more productive than their in-office counterparts. The cloud allows teams to access shared documents anywhere with an internet connection, so there’s no need to copy and send files via email. By offering the option of remote work, employers also offer more flexible working hours and a better work-life balance, improving the employee experience.
- Increased communication: Technology permits team members to communicate with each other from anywhere in the world. Teams today can immediately reach each other and collaborate via modern applications and cloud-based systems like Slack, Zoom, or Microsoft Teams.
- Stronger customer relationships: Social media platforms have facilitated communication with customers. Strong social media posts, online promotions, digital marketing, and the ability to promptly reply to customer messages have increased the ease at which companies build relationships with customers. Increased online exposure also results in greater brand recognition, growing your customer base.
2. Pursue Growth
Global growth is part of the natural projection of many startups, especially those from smaller countries. International growth expands your markets and helps you attract customers before competitors. Growing to new markets ultimately increases your revenue and your chance of long-term success. Hiring international teams can also help you tap into markets with different skill sets to find the most qualified people for every job.
3. Hire the Right People
Building a strong team is crucial, as discord between team members is a significant reason startups fail. When hiring while your company is still in the death valley curve, you’ll want to start with the executive team and work downward as resources permit. Generally, startups should look for candidates who are flexible enough to assume multiple responsibilities and share the same passion for the company’s mission.
While a startup’s founders often assume the roles of chief executive office and chief information officer, they must find talented individuals to fill other roles, including:
- Product managers
- Sales managers
- Business development managers
- Chief technology officers
- Chief marketing officers
- Customer service representatives
How an Employer of Record can benefit startup growth
Partnering with an Employer of Record (EOR) can encourage startup growth, especially when going global. While founders are most concerned about implementing their ideas and achieving product-market fit, they often have little bandwidth to deal with onboarding, payroll, contracts, and tax compliance. With an EOR, you’ll be able to start hiring globally with less risk and no need to wade through administrative tasks.
Working with an EOR also gives you an edge over competitors by providing essential information about international markets. You’ll be sure your company is compliant with local labor laws while still attracting top talent before the competition.
Globalization Partners can help you grow your startup
Globalization Partners has automated global growth to help companies grow and manage international teams from one platform.
Our global employment platform helps with onboarding, benefits, payroll, and compliance in 187 countries. We’ll serve as your EOR so you can focus on developing your business and reaching product-market fit to survive the startup valley of death. Contact us today to learn more.