Two of Alacrity Canada's Senior Advisors talk to our Cleantech Program Director and Managing Director about going through the "valley of death" as a cleantech startup company. The Alacrity Cleantech teach shares their understandings of what the valley of death is, how companies should try to navigate through it, and what lessons or advice they have for entrepreneurs experiencing this journey.
06:28 - Sofie: Definition of the Valley of Death from Investopedia. The death valley curve is the span of time from the moment it receives its initial capital contribution until it starts generating revenue. This period of time can be really challenging for the business because their business model remains largely unproven because they haven't yet begun earning revenue.
7:50 - Cec: First learned about the Valley of Death around 2001 just after the Dot Com bust. Cec was the E-Business Evangelist for PWC.
8:40 - Peter: I call it the cash runway. Peter learned about it the hard way through the first company he started. We were funded as needed - as we needed cash we would make a cash call until that changed. The first law of entrepreneurship is: don't run out of cash. This form of raising funds has its advantages but it's high risk.
10:35 - Rich: Well, I would just call the valley of death: 'startups'. It's the problem of scarcity. There are never enough customers, there's never enough investment runway. First time I was really exposed to it was with an Alacrity portfolio company in 2015 that was in mobile data and telecoms. They had built really interesting tech and had one paying customer but not enough for customers to cover the monthly bills. It was a really challenging time and in the end the company was able to really dig in to a good marketing strategy and get some investors to stick it out and it sold three years later for $40M. But it was really rough there for a while and we were having conversations about how to sell the desk chairs and computers.
12:40 - Rich: There are so many factors at play when a company ends up in this situation and of course there is some element of luck. I do always say 'the harder I work the luckier I get' but of course I know, as well as anyone else, that sometimes things happen out of one's control.
15:10 - Peter: The Valley of Death is where entrepreneurs really show their grit and resilience. Peter tells the story of a company that he led, they were struggling to raise money and were running out of money.
17:25 - Peter: Right before the company I was running ran out of money, like 48 hours before, we managed to sell for 10X. I think the bottom line is entrepreneurial team resilience, creativity and desperation to get you through these valleys of death.
18:20 - Cec: I don't think a lot of founders think about the valley of death or understand that it's coming. So one thing that can help is just understanding that you're going to go through it. Find a mentor or advisor to help you through these sorts of times as a business.
20:30 - Burak: When you take on an investor you're getting someone who could also be an asset to the company. Who can help guide and support you. Money on its own doesn't mean a lot because when money comes with the right know-how, the right networks, it is a completely different thing. Not every investor is the right fit for your company.
22:45 - Rich: Don't be afraid to make the pivot. Every successful company we've worked with has changed what they're doing at some point in the game. They've never built the exact idea from day one. So we try to tell people not to get too caught up in their own assumptions. Also a boring note, is just to have your proper due diligence materials ready. If you're a founder listening to this and you don't know what a data room is you need to stop this podcast and find out how to set one up, because you need to be able to move quickly and if you don't have a data room set-up that is going to become a massive headache that can be largely avoided by taking the right steps early on.
24:20 - Cec: Get an audit. Right out of the gate. Because when you do get a serious investor later on you might end up having to backtrack and get years audited retroactively.
25:25 - Rich: The point when you don't get out of the death valley is when everyone has given up. That's when it's all over. And we've seen founders run on fumes for months and months still trying to pull out of that but sometimes it doesn't work and that's the end of the story.
26:00 - Rich: Our goal is to prepare the companies so that they don't actually land in the death valley. Helping land customers, do deals, build revenues, we like to help with the investor side - helping build pitch decks and providing intros to investors who might be a fit for the companies - and then further work on financial models and different projections and activities to try to make sure the company has a good plan in place so they aren't just driving straight off a cliff.
28:35 - Burak: We provide our portfolio companies with a good amount of communication and marketing support which can really help these companies that sometimes need an educated outside perspective. We also help them see alternative options for their products and services, or also help with investment decks and being prepared for the right investors. Our work is quite tailored. We tailor a custom suit for all the companies according to their needs and have been really successful at this so far.
30:50 - Cec: Because Alacrity is really well informed regarding government programs and funding, Alacrity has really helped some of its portfolio companies to access government funding which is incredible useful to these companies. My comment on realizing when you're at risk of not emerging from the valley of death is when you see the company starting to try to use their accounts payable to get through a period of time. If you're not sure you've got money coming in then that's a huge issue. If you're using your suppliers to get you through a period of time.
31:55 - Peter: This might sound counterintuitive but the entrepreneur/founder has got to be the last person to know. They have to fight and claw and ignore reality to try to persevere. Every startup goes through nightmares and pivots so you really have to have resilience. I think in some ways you have to have a reality distortion experience where you don't see what is actually obvious to everybody else. You can't be a shrinking violet. And it doesn't always work. But I think the entrepreneur is the last one to know when it's all over. The other thing is that as you closer to the valley of death, or the end of the valley, you get more and more desperate and you'll take a worse deal from an investor. We've helped companies out of that scenario, we've helped them see the full scope of options in front of them and helped them get the best and fairest deal possible, and we can help these companies because we've been there ourselves throughout our careers.
34:40 - Peter: Try to get early validation and interest from customers. If you can test your ideas early with a customer then you've got that positive input and you'll have an easier time getting investors on board. If you have those early proof points of your idea with customers, even if it's conditional. Where they say, if your thing can do A, B and C then I'll buy it. So I guess, early customer engagement and validation.
35:30 - Rich: Build a strong and resilient business that doesn't rely just on investor capital. When you're building your plans you want to have a path to the business being able to survive without investor capital. Investment may help scale it up and grow it faster but you don't know what will happen with the economy, investor preferences shift, so a lot will be out of your hands if you're 100% reliant on investors.
26:30 - Cec: Another thing is you need to focus. Some founders end up being a bit scatterbrained. Focus on one vertical to start. Too many pilots, too many different ideas can be a real threat. Pick a vertical that you understand well and drive it that way.