DEFINITION of Death Valley Curve
Death valley curve is a slang phrase used in venture capital to refer to the period of time spanning from when a startup firm receives an initial capital contribution to when it begins generating revenues. During the death valley curve, additional financing is usually scarce, leaving the firm vulnerable to cash flow requirements.
BREAKING DOWN Death Valley Curve
The term death valley refers to the high probability that a startup firm will die off before a steady stream of revenues is established. This period of time can be represented as an actual curve on a graph that shows the decline in capital. During this phase, it may be difficult for startups to raise additional capital. When potential investors see such a decline, they may decide to not back the company. The longer a startup burns through its cash, the likelihood it may not endure as a going concern. Breaking out of the death valley curve can be a turning point towards growing beyond the startup phase.
What Leads to the Death Valley Curve
After a firm receives its first round of financing, it can experience a number of initial costs. Offices are usually procured, staff is hired and operating costs are incurred; meanwhile, the firm is not earning significant income. Other costs associated with the launch of the business that factor into the curve can include research and development of the product or service, and the cost of the product launch and bringing it to market.
Even after the service or product becomes available to the customer base, the startup may continue to face costs while not generating any revenue, thus deepening the curve. For example, after a product is on a shelf or made available online, it can incur “slotting fees” from a third-party seller who wants to move inventory.
If customers do not respond to the product, the startup cannot make back the money it has already invested in coming to market. Furthermore, ongoing costs to maintain its staff and operations are still incurred while the company is trying to attract revenue. Such circumstances may befall startups, regardless of whether the product is an app, a service, or a retail item.
Unless a firm can effectively manage itself through the death valley curve, it will fall victim to negative cash flows. This challenge, among others, contributes to the usually high attrition rate among startups. Scaling up to a larger operation typically requires generating enough customer demand to meet revenue needs, while also handling costs to allow the company to make new investments towards growth.