“One of the main mistakes made by new startups - haphazard development with the idea that if they have money, they can continue working. They will outburn in a year or even in six months. Okay, just a couple of months is enough. In order not to fall into the "valley of death", you need to count the costs carefully” - advises the investment director of Zub Capital, business angel and mentor Viktar Dzenisevich.
Count how much money do you have
Sometimes attracted investments immerse startup founders in a mild euphoria. And those, despite the fact that the company works with losses, compensate for the lost. In particular, they hire expensive employees - for example, strong sales managers from the USA. At the same time, the founders do not consider how long they will have enough borrowed money. Will the product manage to earn or at least break even during this time?
"Death Valley", the period when investor’s (or your) money is already running out, and the project is still working in the red, comes insensibly. The staff at that time is bloated. It may have good specialists, but the company still has no money.
Death Valley as a stage in startup Death Valley is the start-up period, its most difficult initial stage, when all costs, investments and other expenses were made, the project was launched, but there is no profit yet. The project is unprofitable, but it is too late to abandon it, as a sufficient amount of effort, time, resources and money has been invested.
Death Valley can be observed in the following most risky startup cycles:
- Sowing stage (Seed).
- Launching startup phase.
- Stage of early growth (Early Growth).
To avoid this, you need to count and plan, know the current and predicted burn rate. The CEO must understand how he will finance the costs. When a project has no money, it has no blood. Count costs for 4-6 months in advance. At a minimum, this is an office rental, salary, hosting.
Attract the necessary minimum
To understand how much money is enough to attract, you also need to count the costs. Suppose you predict that you will have your first revenue in six months, and until then, one million will be enough. Do not ask investors for five million: why should you give a large percentage of the company for unnecessary money?
Many companies did not die of starvation, but of overeating and indigestion. It is important to have reasonable investments. In addition to caring for the product, the project’s CEO has a great responsibility for the people who work for it. He should see where in the coming months he will receive funding for the development of the project and the salary of the team.
Make financial plans yourself
At the first stage, when you still have a groundwork, you can do without a professional financier. The CEO will be able to learn this himself: there is information in the public domain, courses and webinars. I know companies that have already had multi-million dollar turnovers, and CEO himself has successfully made financial plans “from scratch”.
Close zombie companies
There are breaking even zombie companies which can be easily refinanced. They can exist for years, and the founders do not close them. Perhaps good people work there, and the project is interesting. It does not grow but draws your resources. The reasons for this may be different - the result is the same. You can try to make a pivot, change the team, but probably the project should be closed: zombies do not come to life.