Death Valley Curve

What Is the Death Valley Curve?

The death valley curve depicts the period in the life of a startup in which it has started operations however has not yet generated revenue. The term, usually utilized among venture capitalists (VCs), is derived from the shape of a startup company's cash flow burn when plotted on a graph. During this period, the company exhausts the initial equity capital if by its shareholders.

Understanding the Death Valley Curve

A startup company's death valley curve is the span of time from the moment it accepts its initial capital contribution until it finally starts generating revenue. During this window, it tends to be challenging for firms to raise additional financing since their business model has not yet been proven. As its name suggests, the death valley curve is a challenging period for startup companies marked by an uplifted risk of failure.

The reason the death valley curve is so challenging for startup companies is that various expenses must be borne before another product or service can start generating revenue. These incorporate predictable costs, for example, renting office space and paying employees, as well as different costs which are harder to anticipate, like marketing and research and development (R&D) expenses.

Getting through the death valley curve marks a significant achievement in the life of a startup company, signaling to investors that it has endure its startup phase and stands a better chance of reaching maturity.

Generally speaking, the more extended the death valley curve, the more probable it is that the company will fail prematurely. The shape of the death valley curve will vary on a case-by-case basis, contingent upon factors, for example, the business plan, the industry niche, and the amount of seed capital invested in the startup.

Except if a startup has insightfully budgeted for this troublesome phase and is prepared to carefully monitor its expenses, it will probably battle with liquidity issues. The more drawn out the death valley curve continues, the more troublesome it tends to be for a company to invest in growth initiatives and start scaling its business.

Example of a Death Valley Curve

Assume you are the pioneer behind a startup company called XYZ Services, which follows a Software-as-a-Service (SaaS) business model. You as of late obtained $5 million from initial fundraising, and anticipate that it should take three years before XYZ starts generating revenue. You anticipate that the initial two years should be spent fostering the SaaS platform and the third year to be dedicated to client testing the software, with first sales initiating at the finish of that year.

Along with your management team, you foster a plan for managing cash flow all through this critical period. With 20 team individuals and an average salary of $70,000, you estimate that payroll expenses will total $4.2 million over the period, for an average of $1.4 million every year. Office and administrative expenses, meanwhile, are estimated at $300,000 altogether, or $100,000 each year. Altogether, you hope to spend $4.5 million over the initial three years, leaving a contingency budget of $500,000.

Taking into account that you anticipate that your expenses should remain at generally $1.5 million every year for the foreseeable future, your firm should start generating at least $125,000 in revenue in somewhere around four months following the finish of the three-year startup period. Failure to do so would cause XYZ to burn through its contingency budget and face a cash crunch.

While plotting these figures on a graph, you see the death valley curve that your company must navigate to make due.

Features

• Getting through the death valley curve means beginning to generate adequate revenue to become self-sustainable before the initial invested capital runs dry. This is a significant achievement for startup companies.
• The death valley curve is an articulation utilized by VCs to depict the critical initial phase of a startup company.
• During this period, startup companies must operate with practically no existing revenue, depending on their initial invested capital.