An Entrepreneur’s Guide to Surviving the “Death Valley Curve”

According to recent estimates Around 90% of start-ups fail. With the global start-up economy worth $3 trillionthere is a lot at stake.

Our research has focused on a crucial initial phase of new ventures, known as “the Death Valley curve‘, when extensive work has begun on a new venture, but sufficient income has not been obtained. During this time, companies exhaust their initial capital to start the business.

How do successful companies master these difficult times? What steps entrepreneurs should take depends on the strategic situation they find themselves in. We’ve identified four stages of the Death Valley curve and created a matrix that entrepreneurs can place their business on to identify key challenges ahead.

Our matrix is ​​based on two key challenges that all new businesses face: 1) Do they have the right business model? and 2) Do they have growth ambitions?

To determine if they have the right business model, entrepreneurs should use the two business model tests proposed by Joan Magretta: the narrative test and the numbers test. A company passes the narrative test when the business model is logical and aligned—in other words, when the business model story makes sense. The numerical test focuses on the financial performance of the business model and whether that business model can generate a profit. If sales exceed costs, the numerical test passes.

So-called “growth ambitions” describe a new company’s projected growth goals in terms of customers and financial performance. It is often these growth ambitions that attract investors to fund the costs at the start of the journey. They therefore form an important dimension in the decision-making process of new companies.

The four phases of new businesses

If we map the success of the business model and the growth ambitions in a matrix, we can identify four phases of new companies: shape-ups, stand-ups, start-ups and scale-ups. Each brings strategic challenges.

shape ups

These new companies have already achieved their growth goals, but have failed to maintain a well-functioning business model. The reasons may include logic that no longer makes sense because the market has changed (eg. Tamagotchi), outdated technology (e.g. investments in Personal digital assistants before the advent of smartphones), value propositions challenged by competitors (eg. Uber is challenging the taxi industry) or significant changes in customer requirements (e.g. trends towards non-smoking, veganism or do-it-yourself). In the latter case, the problem is not that a competitor is offering something better, but that customers are disappearing from the existing market altogether.

All of these situations have one thing in common: after significant growth, the business model has become irrelevant and the business is now in a declining market. Therefore, these new companies must evolve to survive. Therefore, shape-ups face the great challenge of (re)inventing their business models, be it through innovation, business development, strategic repositioning or divestiture. At the same time, these companies need to restore investor confidence as they weather disappointment. Put simply, these companies need to reinvent their business models and themselves as entrepreneurs.

riser

After companies have reached their desired size, entrepreneurs should focus on stabilizing the business model and securing the return on investment. Stand-ups have left Death Valley for a moment, but that doesn’t mean their troubles are over. You must do whatever it takes to stay relevant with consumers, outperform the competition, and fight any complacency that might creep in. In other words, all their efforts must be carefully put into maintaining their position.

The challenges in this phase are to protect the business model and secure the associated investments. These goals can be achieved by forcing competitors out of the market, optimizing processes and earnings, or gradually developing the business model further. Simply put, these companies need to protect their business models – today and in the future.

startups

These new ventures have an ambitious growth target, but have yet to find a well-functioning business model. Their defining elements are the search for a business model and their constant experimentation, often in the form of trial and error.

For example, start-ups can shift focus from one customer segment to another, develop new products and services, or change their payment options from fixed to subscription to on-demand and back again. They also often try different sales and marketing tools to find customers. In addition, they are developing new abilities to support all of these mentioned changes.

In short, nothing is fixed in a start-up and everything is in flux to find a profitable – and sustainable – business model.

Of course, the search for an excellent business model is not free. However, since everything is small, the overall investment is usually small. Strategies employed typically include fail-fast, trial-and-error, co-creation, and crowd-funding—some of the most popular startup principles. Put simply, the strategic challenge for startups is finding the right business model.

scales

After a startup has developed a suitable business model, it can decide to scale up, usually in one of two ways. First, scaling can be achieved by onboarding an increasing number of customers. In this case, the business model already includes the necessary skills and value proposition – the focus is on winning as many customers as possible as quickly as possible. This is typical for digital, platform-based business models. Second, scaling can result from replication of the original business model, as seen in franchise systems. Think of a restaurant chain: apart from back-office functions (like supply chain, human resources and IT), identical copies of the business model are created. Customer scalability therefore requires scalability in resources and capabilities.

For scale-ups, the challenges are to onboard customers quickly and find the resources needed to scale up the business model so that capabilities grow with the number of customers. Simply put, scale-ups need to fund expansion and constrain innovation to meet projected growth expectations.

Businesses can fall into any of the four phases, but do not have to go through all of them. Think of Amazon, that went out pretty abruptly Start up to scale up. Jeff Bezos found a business model appropriate to the advent of the internet, founded a company with a vision of becoming from the beginning “the largest bookstore in the world” and consistently focused on long-term growth at the expense of short-term profits.

However, sometimes companies actually go through all phases at different points in time. Consider Facebook’s trajectory. At first they were a startup that had to find a business model. Then Facebook evolved into a scale-up that sought growth by scaling its model. If you went public, they essentially turned into an insurgent trying to secure their model. But with that long-standing criticism Based on their business model and data usage, they may now be in the shape-up phase where they need to reinvent their existing business model and essentially go entrepreneurial again.

Lessons for Entrepreneurs

Our work suggests that there are three key lessons for entrepreneurs:

  1. Know what phase you are in. First, entrepreneurs need to diagnose what phase they are in. If you don’t know where you are, you don’t know how to move.
  2. Make the decisions required for your phase. All stages bring their own set of challenges, and entrepreneurs should focus on the important ones related to their current stage. For example, radical innovation and business development is necessary for start-ups and shape-ups – and problematic for scale-ups and stand-ups. Achieving ROI is important for stand-ups, but not yet an issue for startups and scale-ups as they focus on selling their dreams and projections to investors.
  3. Ensure coordination between stakeholders. It is crucial that all stakeholders have the same understanding of the phase and the challenges of the new venture. If the founder has an understanding that the company is in a stand-up phase while the investors believe it is in a scale-up phase, this leads to severe conflicts that affect the new company’s chances of survival .

The bottom line is that it is important to honestly assess the situation of the organization and to develop a strategy accordingly. Not understanding the situation can lead to a significant loss of investor confidence and investments. The road out of Death Valley is paved with situational awareness and transparent communication, stage by stage.

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