Early stage funding: Is the "valley of death" real?
You can’t read much about the venture capital industry before you start hearing about the so-called “valley of death” for early stage companies.
Conventional wisdom holds that young companies enter that valley, in which attracting investment capital becomes extremely difficult, at an early stage, typically between an initial round of angel funding and the company’s first institutional series A round.
But is the whole valley of death concept just media-fueled hype? Maybe so.
“From my perspective, there is no valley of death,” said Tim Moran, CEO of PediaWorks, speaking on an Ohio Venture Association panel on the topic.
As Moran pointed out, if you subscribe to the theory of efficient markets, then it’s tough to say there are tons of investment-worthy deals floating around that aren’t drawing cash.
When it comes to capital funding, the continuum typically looks like a funnel: In the early stages, lots of companies can get an investment, but as time goes on, more and more companies encounter problems and drop off. (Think of companies failing as the narrowing of the funnel.)
That’s essentially nothing more than a culling of the herd, a Darwinian means of separating the companies that can prosper from those that can’t.
Plus, angel investors, to some extent, and the government, to a lesser extent, have stepped up to fill the void created by a thinning of the ranks of venture capital firms in funding young companies.
Unfortunately, the hard truth for many hungry and hardworking entrepreneurs is that if you fail at fundraising, there’s probably a good reason for it.
“Maybe your idea just isn’t good enough, or you’re not a good enough entrepreneur,” Moran said.