Everyone involved in the development of companies from their early stages to mature is familiar with the term “Valley of Death.”
Traditionally, the road between a discovery generated from basic research to a commercial product or process is long and, according to some, rife with significant roadblocks. Innovators and investors alike routinely claim that a ‘funding gap’ or ‘Valley of Death’ exists between basic research and commercialization of a new product. Early stage investments in companies are often made without sufficient attention to the likely investment decisions needed at later stages of the innovation process. The inability to generate additional funding at that point represents the chasm that has to be breached in order to progress, otherwise known as the Valley of Death.
But today there is an even earlier Valley of Death or—perhaps a more apt description would be—a risk of the project being “still born” for lack of initial capital. Many projects that our firm comes across seem to have great potential and even generate interest among multi-nationals, but cannot corral sufficient initial investment capital to ensure a successful “live birth”. In today’s economy, early stage investors want to see the kind of performance metrics that are themselves very much dependent on the required, but often unavailable, initial funding.
We ran across a company recently that is a good case in point. The company, whose expertise is in background is in efficiently growing apps via Facebook advertising, has designed an app called “Paq” which is a layer on Google Maps that enables users to have chats about any place in the world in real time. Paq is built for an optimal mobile experience, designed specifically to be used on the go, exactly the capability that today’s younger generation is seeking. The app operates in the space of social discovery and encourages the building of tight communities of, for example, young travelers, new Israeli immigrants, lone soldiers and the like.
The developers put all of this together, using their own funds, in the first half of this year and the app has been released publicly on Google Play. But raising investment capital for growth is difficult because every potential investor wants to see the kind of metrics that can only be achieved after the entrepreneurs raise some initial capital.
My guess is this is an outgrowth of the more difficult economic conditions in the world today resulting from the economic downturn of 2008. Angel investors are more concerned about risk, large companies want to see real performance before getting involved with new technologies and the budding entrepreneur faces almost an insurmountable challenge to locate early stage investment capital. (While there are those who might argue this point, the fact remains that attracting early investment remains a challenge, for whatever reason.)
Crowdfunding has certainly addressed a portion of the problem but it does not match the needs of a rapidly developing tech community. In Israel, this issue is even more acute given that we see the emergence of approximately 1,000 new tech startups every year, many of whom cannot successfully get past the birthing stage.
The bottom line? In order for any high tech community like Israel to continue to grow, early stage investors need to be willing to accept the risks that come with putting money into fledgling operations. The game is risky and the risk is not for everyone; however, for those who have the stomach for it, the rewards can be significant.
Ben Franklin said “All mankind is divided into three classes: those that are immovable, those that are movable, and those that move.” The entrepreneurial world needs more people who move.
Sherwin Pomerantz is president of Atid-EDI Ltd., an economic development consulting firm with 26 years’ experience in assisting overseas companies and public entities in their export promotion and foreign direct investment attraction efforts.