What is the Startup Valley of Death?

What is the "Startup Valley of Death"?

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In this article, you will read about: 

1) What is the "Startup Valley of Death"?

2) How to raise funds despite being in the Startup Valley of Death

3) Parties to turn to if in the Startup Valley of Death

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1) What is the "Startup Valley of Death"?

In general terms, the "Startup Valley of Death" describes a supply gap in the venture capital market. More specifically, it describes a gap between low-ticket business angel investors and more institutional investors, such as Venture Capitalists(VCs), as shown in the graph below. While  more and more VCs have moved into the "early stage" of business building in recent years to fill this gap, the Startup Valley of Death still exists and is likely to stay around. Given the more unstable global economic situation, I foresee that investors will be less willing to take large risks and therefore the gap will begin to grow again in the next few years.

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The graph shows a fundamental dynamic of venture capital and risk: Typically, with the inception of a company, the capital need of a venture is comparatively low, while the risk of failure is high. Over time, the risk of failure will fall and the capital need of the company will rise. However, while the need for capital grows fast, the risk of failure will decline slower.

Compared to low-ticket angel investors and large-ticket Venture Capitalists, there are few investors prepared to invest a large sum of money in an early stage company that is still in its first two years and might still have an unproven business model - thereby, creating the so-called "Startup Valley of Death''. Since most startup companies rely on external capital to grow for the first years, with no investors to turn to, Startups run out of capital just after a few years of existence.

The numbers on the axis refer to typical amounts in the European region. In other parts of the world, like the USA, investments are usually much larger. Generally speaking, in Europe, closing Seed rounds in the 1M to 5M Euro range is a difficult endeavour (that still depends on the business case of course).

My best advice about how to avoid the Startup Valley of Death is to not raise funds too early. In order for you to get the metrics described above, you need to have achieved or come close to product-market-fit and started generating some repeatable growth. If you raise funds so early in the development of your business idea that you need to spend all the seed capital just to figure out what the business idea actually is, chances are you will have run out of capital before you have any relevant metrics to show. I am a big supporter of bootstrapping in the very early days of your business.

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2) How to raise funds despite being in the Startup Valley of Death

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Stating the obvious - you want to avoid raising funds in the Startup Valley of Death. However, if it's unavoidable, make sure to use the pre-seed and seed funds wisely. Looking at this graph, it becomes clear that lowering business risk for investors is vital. Prepare for the funding round by collecting robust data that will communicate to investors that a business model is proven and starting to consolidate: The way to raise funds in the "Startup Valley of Death'' is by raising money not based on a "vision" or an "Idea" but based on proven, measurable business metrics.

What type of data is required, entirely depends on the business you are running. If you are running a B2C business & product, your main metric might be the number of signups or orders per month. If it's a B2B product, the most important metrics will most likely be Life Time Value (LTV) and Customer Acquisition Cost (CAC), so how much money you will earn over the lifetime of a customer and how much it costs you to acquire such customer. Make sure you have a good framework and proven metrics from where you derive these metrics from. If these metrics are entirely new to you, I recommend learning about the concept of unit economics and how that applies to your business. I will make sure to write about unit economics in a later blog post.

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3) Parties to turn to if in the Startup Valley of Death

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More and more VCs are looking into the early stages of business building nowadays. Some of these VCs are Earlybird Venture Capital, Luminar Ventures, Maki.vc, daphni or Inventure.

Another good resource to raise early funds are governmental institutions and innovation aid programs, such as Vinnova or Almi Invest.

Yet, the best resource to turn to - especially if running a B2B business - are customers. Taking on larger consulting projects with a partner will help to finance the company while learning more about the needs of the customer.

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