What is second Valley of Death?
Why companies fail to survive the second Valley of Death?
The most important thing you must do to survive the second Valley of Death
This is an issue which is not much discussed in the business world. Though many founders face this issue now, they are not aware of it. Ultimately, this issue leads companies to even go bankrupt. Investors also should learn about this issue deeply and ways to deal with it. It will enable them to help the companies they invest in.
What is second Valley of Death?
John is the Founder/CEO of a technology product company. His product achieved product-market fit, raised initial investments, has around 20-40 employees and revenues are growing.
John started to see the following symptoms in his business but didn’t realize that his company is in the second Valley of Death.
- Growth is slow
- Profit is not scaling with revenue
- Difficulty in attracting, hiring and retaining top talent
- Cash flow is negative
- Failing to delight customers which results in losing them
- Strategies which worked well in marketing and sales is not working anymore
- Communication with employees is getting more difficult
- Employees are working in different directions and not in an aligned way to achieve the organization goals
- Employees are not meeting performance expectations
On an emotional level, John found it very tiring to run the company. When the business increased, it was supposed to be more easier and fun. What happened was actually the opposite. John had to get involved in every issue in the company and was not getting enough time to spend with his family. John started wondering why is this happening so.
If you can relate John’s situation with yours, you must learn why this happens and how to deal with it. You must take actions before it gets late.
Technology product company is used as an example above for making the issue easy to understand for you. Companies in any industry can end up in the situation discussed above. Those companies are called scaleups/high growth firms/fast growing companies. Organisation for Economic Co-operation and Development (OECD) defines these companies as: “All enterprises with average annualized growth greater than twenty percent per annum, over a three-year period, and with ten or more employees at the beginning of the observation period. Growth is thus measured by the number of employees and by turnover”
Why companies fail to survive second Valley of Death?
Scaleup Dashboard 2020 by Erasmus Centre For Entrepreneurship, Rotterdam says that nearly two thirds of the scaleups in Netherlands subsequently lose the rapid growth and thus do not survive the second Valley of Death. Researches shows that, scaleups in all parts of the world face similar challenges.
Primary Reason: Failure in managing the increasing size and complexity of internal organization
Complexity of a company increases with growth. Each employee you hire, new customer you acquire adds to complexity. There is a big difference in the complexity when you are a startup with five employees and a scaleup with 40 employees.
Let’s go back to the example of John.
John was responsible for customer success when he started the company. Customers became very happy with the way he served them. This resulted in getting a lot of new customers from referrals. As the number of customers increased, John hired two people to do the job he was doing. This single action increased the complexity of John’s company several fold. As the two new hires didn’t do their job properly, John’s company ended up in the following situations:
- Losing customers
- Unpaid invoices
- Bad reputation in the industry
- Internal conflict between sales, marketing, finance and customer success departments
Are you facing a similar situation?
The above situation tells that the success of the two new hires starts right from the recruiting. You need to think well and make a clear job profile, do interviews, make hiring decision, onboard and train them until you are 100% sure that they are the right people for that position. What happen in fast growing companies is exactly the opposite. Founders have to deal with numerous things on a day to day basis. He/she won’t be doing most of the things mentioned above in a structured way. They just don’t know how to deal with the increasing complexity and needs help.
Being innovative, achieving product market fit and raising initial investments is not enough to survive the second Valley of Death and maintain the rapid growth of your business.
How can companies survive the second “Valley of Death”?
It’s too long to explain every thing a company needs to do to survive the second Valley of Death in a single blog article. Let us take a look at the most important thing you must do.
Build The Right & Cohesive Leadership Team – Do This Before Things Get Unmanageable
Many entrepreneurs believe that they have to get involved in everything to scale up their business. Letting go of the need to control everything is the first step. Imagine that you are not able to work for the next three months. How can the company operate without you? If your company is dependent on you, your company will get into trouble when you can’t work.
The key question is how to start building the right leadership team. It depends on where your company is standing right now and current challenges. You may have to build the next level of leaders in finance, marketing, sales, operations, strategy, R&D etc. depending on the current situation of your company. Founders may not have knowledge/experience in hiring the right people. In such cases, take external help. Mis-hires are not affordable at this stage.
The key to success is in building the right leadership team before complexity starts affecting your company badly. Building a cohesive leadership team is not easy as it sounds. It takes time and patience to build that team. This team will be the biggest asset which will help you to take your business to the next level.
Once you build the team, you need to do a lot of things to survive the second Valley of Death. Some examples are:
- Develop a clear vision and goals for the company
- Top-down communication about vision
- Setting up clear processes in recruitment, operations, finance, sales
- Assigning clear accountability, responsibility and authority to every employee
The list goes on. There are many things you need to do for surviving the second Valley of Death and scaleup your business. ‘What to do first’ depends on your business. If you don’t know how to do it alone, ask for help.
Good news is that it’s definitely possible to survive the second Valley of Death and scale up your business. If you act now, your business would survive otherwise it may not.
Interested in discussing about scaling up? Feel free to contact me