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.
[Photo from flickr user Cool Guyz]
By Brandon Glenn MedCity News
Brandon Glenn is the Ohio bureau chief for MedCity News.More posts by Author
I spent 5 year researching this subject for my new venture by interviewing 1000's of entrepreneurs, CEOs, investors, and notable experts. Snapshot of my findings: 1. There is most certainly a "Valley of Death" in the US 2. There is no shortage of capital in the US 3. It's not the SEC's fault 4. It's a marketplace issue Bill ps. I was the Founder/CEO of a contract manufacturer of critical components for medical devices for 35 years.
Yup, as investors we love the Valley, it challenges entrepreneurs to do all to get through it. What is interesting is that the Valley does not include the perspectives of investors. Yet most define the Valley as a market failure, not the rational behavior of investors to risk. I did a program for the World Bank, called 'Bridging the Valley of Death,' solutions to create financing initiatives that better match the rational behavior of investors to risk. View http://scalingupinnovation.com/?p=435.
There definitely is a "valley of death" in the medical device field. It isn't a matter of culling, it is a matter of drought. We see several technologies that would benefit patients at a profit to the startup, but can't raise funding because the well has become so dry. There are noted successes, but far more unmentioned non-starters.