the new chasm - cardboard or concrete
There seems to be another chasm (in addition to Moore's well documented one) developing in the tech start-up world. Maybe it's been here for awhile, I'm not sure. In business terms a chasm has come to mean a logical gap that must be crossed to continue the growth and evolution from a new business to a more mature, sustainable one. This new chasm shows up earlier than Moore's in the evolution of start-ups. It may be showing up more often now due to the continuing drop in start up costs and development costs to get a tech or web product developed. It also may be showing up more often than in the past as a result of the evolution in venture funding metrics and acceptable risk profiles.
This chasm may come in many shapes or sizes, but it can be described as the place in a company's evolution post-seed or angel funding but prior to any real revenue generation or customers. Companies on the approach side of this chasm typically need to raise more money in larger amounts in order to fund the customer acquisition strategies (marketing, sales, R&D to make the product production-ready) needed to prove the model or product works. Crawling their way up the other side of said chasm are the companies that have begun to operate like a real business (selling product, dealing with customers, etc.). Attracting funding while on the approach side can be a challenge, and that is often when companies need the capital most. Ironic? Not really.
Understanding the dynamics of this may help you get across to the other side, and having a spotlight on it early on should influence your business planning, cash burn and fundraising strategy. Companies out looking for capital that are on the approach side or in the chasm may encounter hesitant investors or weaker responses then anticipated. Lets take a look at why
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The Risk Level - With 1 in 10 (at best) venture funded start-ups making it, and the IPO market all but in stasis, the name of the game is demonstrating execution and validating the market and product through sales and customers or traffic. This time around (bubble 2.0, that is) hair-brain ideas are again able to find money, but smart investors demand real revenue and traction before handing over anything more than seed money. The no-mans-land of being post-idea formation and pre-revenue means that you have managed to get to first base and develop a business strategy and even some technology or service, but there is no assurance that your can generate meaningful revenue yet or that your strategy is going to work. Your technology or service may look good on paper, but you also have not proven it will meet customer needs and be compelling. VCs and Angels want to invest early in great ideas, or a bit later once the company has proven it can execute and the market is there. When you are in between these stages, your risk profile is even higher. The earlier you can begin to prove the model the smaller you make the chasm. Often we see smart, well-run companies stuck in between because they need the next round of capital to prove they have it right. Investors may say "call me back when you have 2 quarters of revenue and a distribution channel or partner".
"In Between" Money - If you are taking an outside-in view of your business, and have realized that you need to raise money to GET to the market, perhaps you have found this new chasm. Companies in this spot are not ready to raise a large round for operational expansion yet, but they have burned up the seed capital getting to the edge of the chasm. They just need some fuel to get across. Every situation has it's differences, but the themes are similar. In some cases, the timing of fundraising activity needs to be put in sync with the overall business plan and milestones. Knowing that investors tend to favor companies that are either sitting short of, or across this chasm can be very helpful. How you position the opportunity to investors and plan the use of the capital also becomes critical.
Tired cliches aside, it is all about having your eyes open when starting and growing a business from back-of-the-napkin idea to mature ongoing concern. Knowing what private equity investors look for in an investment opportunity and making smart decisions early on can mean the difference between never seeing your second round of funding or flying over the chasm without looking down.
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Posted in Business Service Post Date 09/24/2015