Startups: Tips to cross Death Valley

The final option may be to look for a new partner to inject money into the company and among them are angel investors and capital funds.

The valley of death is the term that has been coined in business schools to describe the moment when entrepreneurs run out of financing resources to continue their business.

More than a place, it is a moment in time of the entrepreneurial process in which, if not acted appropriately, companies go bankrupt and close.

Several factors can lead to the valley of death.

The main ones are financial, but these are also associated with commercial and operational aspects that were not corrected in time.

The entrepreneur enters it when his financing sources have exhausted the flow of resources that supports the growth of the company and the income generated by its operation is not enough to cover the capital requirements.

In a standard venture, the 'valley of death' is characterized by having a capital need of 200 to 1,000 million pesos.

The operating income obtained to date is close to the same value, with margins of 10 to 30 percent, depending on the economic sector in which the company is located.

It is common for the entrepreneur to think that at some point operating income will finance his growth, but the reality is that if the company is successful, the demand for resources will be greater than the net profits it is generating.

At that point, the entrepreneur has to make strategic decisions that can change or maintain the objective proposed with the creation of the company.

You could put her in debt, but you will find that the traditional financial system will not lend you the necessary resources because the amounts required are higher than the standards established for credit.

The entrepreneur could also rethink the company's growth strategy, adjusting it to the pace of resource generation, but he runs the risk of losing important market positioning opportunities or being exposed to competition.

It could be financed through its suppliers by negotiating longer terms to pay them, but if the company is growing it will demand greater inputs, which would not be obtained if they are not paid under favorable conditions to the suppliers.

Another alternative is to request resources from your traditional financial partners, but perhaps they have already provided all they had available.

Turn to the “angel”

Faced with this critical situation, the final option is to look for a new partner to inject the appropriate resources into the company: the angel investors and capital funds.

Angel investors can be found in the entrepreneur's inner circle, through existing business contacts and work colleagues.

They are not part of the first investment group with whom the project was started –generally friends and family–, but they can be found through them.

It is important to understand that not all potential investors are angel investors. This is a person who invests money and time in the company, and expects to retire after achieving established growth goals, usually in the third or fifth year after joining. It protects the entrepreneur, since it considers it the most valuable capital of the company in that stage of growth.

It does not intend to take over this and negotiates favorable conditions for both parties, understanding the opportunities and risks that the venture has as it is on the threshold of the 'valley of death'.

The other potential financiers are the Capital Funds.

In the American financing industry, these are clearly separated into funds for ventures or undertakings, and equity or capital funds for consolidated companies.

In Latin America there are more equity-type funds and venture-type funds are just appearing. However, globalization is facilitating the flow of investment of the latter type, common in the United States and Europe, in Latin American companies.

The advantage of these funds, if the entrepreneur manages to be selected as an investment object, is that their standards, procedures and policies have less variability than those of an angel investor.

However, their investment in the ventures they evaluate is 1 to 100.

The ideal is to try not to reach the 'valley of death'. To do so requires the entrepreneur's permanent awareness of the financing resources necessary to grow and his ability to maintain or obtain the financing sources that accompany his growth.

The company's cash flow is the food for growth.

The entrepreneur must foresee these flows so that he can maintain the pace of growth, if he does not do so it will stop and the business will be slowly led to the 'valley of death', since the scarcity of resources to attend to its growth will put him at a disadvantage. with its competitors and will end up losing its market.

At each stage of business growth, financing is required. You must understand this concept and prepare to look for the appropriate options that will allow you to successfully continue your venture.