Entrepreneurs without money (X): Raising up from the valley of death.
Good morning to all:
Today we will continue understanding the relationship between the entrepreneurs´development phases and the sources of funding. How can the entrepreneurs access to finance?. Yesterday we started to write about the different stages of an entrepreneur development: pre-seed, seed, start-up, emerging growth, and expansion. After several years of expansion growth, the company begins to mature, and it will reach the stage of maturity.
Many entrepreneurs believe that they have achieved the level of start-up, when in reality they are still in the stage of Research and Development or testing several pilot projects. And what is worst is the fact these entrepreneurs try to raise capital using the wrong sources. For example, they get in personal debt accessing lines of credit or credit cards and sometimes using their parents´ collateral or personal assets. Please don´t do it. To get debt meanwhile in the “valley of death”, is the worst decision you can do (whatever type of debt short or long term: crowdfunding debt, credit cards, a line of credit, a loan, etc). When entrepreneurs are in the “valley of death”, even if they have personal assets or a home to commit as collateral, it is not wise to give them away.
Let´s understand what is the “valley of death”. The “valley of death” is a common term in the startup world, referring to the difficulty of covering the negative cash flow in the early stages of a startup, before their new product or service is bringing in revenue from real customers (M.Zwilling).
We did a search about the valley of death in google and we found many graphs. We decided to stick to the original source (Osawa and Miyazaki, 2006).
The Valley of Death, Osawa-Miyazaki, 2006.
The reason why 90% of entrepreneurs do not leave the valley of death (VoD) stage, is mainly because of the weak passage through the pre-seed and seed stages. “According to a Gompers and Lerner study, the challenge is very real, with 90% of new ventures that don’t attract investors failing within the first three years. The problem is that professional investors (Angels and Venture Capital) want a proven business model before they invest, ready to scale, rather than the more risky research and development efforts”. That is why Eleonora Escalante Strategy advises: don´t knock the doors of VC or business angels, not until you have the correct business model, you have already launched the product (and is already being sold for a couple of years) and you have started to see positive Free Cash Flows.
When analyzing this graph, we did some adjustments. Why? Simply because we believe it has to be improved. Let´s see what we have observed:
If you wish to see the last slides in PDF, click here: Eliescalante Aout 2018 Entrepreneurs without money X VOD.
Each entrepreneur is just rushing, wishing to leave this stage, without considering this is the most wonderful phase to do our homework correctly. During this setting, the objective is to go from an idea to a start-up. And this change doesn´t happen by just projecting in terms of revenues or net profit but in terms of free cash flows (FCF). When you start to do Free Cash Flow forecasts, many of your initial ideas will prove to be not profitable… and you will end up dismissing them naturally. In addition, the initial idea can change completely. After testing several pilot business models, we may end up conceiving a product just the opposite of the initial idea. For example, instead of the first idea of building homes and by selling them, the entrepreneur will end up losing the land. The entrepreneur can do a sustainable agriculture project for the community without losing the land, and it can prove to be much profitable for the long run than the initial real estate idea. In addition, a veggies garden can be a pioneer project in many latin american cities, which can prove to become a success to feed a community with organic food and plants (with no fertilizers or pesticides).
The key to rising from the Valley of Death happens when we focus on doing what it needs to be done during this phase. Don´t risk it by asking for debt. Don´t go to business angels or VC when you are not ready. Accumulate your own savings, and try to get a strategic advisor on board. The Valley of Death in the entrepreneurship development is the moment to build right value propositions and business models. Many of them. Don´t worry about making mistakes. Do them here, in this stage. Use Free Cash Flows for your forecasts (not revenues, neither profits). Be open to different alternatives. Do not focus just on one industry or product-services, sometimes with little investments, innovation efforts and without diluting your equity, the original idea may change completely and the right one, will give you a hug of hope which you did not see in the first place. You will rise of the Valley of Death only when the right endeavor comes into the spotlight.
To be continued…
Source References:
https://www.weforum.org/agenda/2015/05/how-to-innovate-through-the-valley-of-death/
Disclaimer: All the presentation slides shown on this blog are prepared by Eleonora Escalante MBA-MEng. Nevertheless, all the pictures or videos shown on this blog are not mine. I do not own any of the lovely photos or images posted unless otherwise stated.
Eleonora Escalante Strategy 
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