Ramesh Mohandas 118221495 Valley of Death “Frictions in the credit markets preventing entrepreneurs with good ideas from commercializing product due to lack of capital” Word Count: 1241 words
Valley of Death is a phenomenon and challenge for companies in various industries because most startup tend to fail. The valley of death was first introduced by Bruce Merrifield (1995) to illustrate the difficulty in transferring solutions to agricultural challenges to third world countries. Startups are faced with financial risk which is the dominating factor that detriments a scientific research that can potentially be developed into a new product. During this business phase the survival rate of startup diminishes (Ries 2011). Figure 1: Valley of Death Source: UC Davis During the seed stage of startup, initial investments is mostly from friends & family or angels, at this stage the company is yet to generate positive cash inflow. In order to get additional financial support to stay liquid the startup company seek venture capitalist. Most of the company fail in this financial gap typically due to large informational problems associated with assessing the value of an undeveloped innovation, thus the ability to evaluate it will be difficult. Entrepreneurship plays an important role in initiating a link to countries financial market development which subsequently results in economic growth. ( G. King, Robert & Levine, Ross. (1993)) . the main reason to this is that a large fraction of growth in economy is due to emergence of new innovative firms. A startup need to raise capital to fund bring their research project to the market, cross-sectional differences in the market ability to select and finance most promising idea determines the productive growth of an economy. The ability of the capital market is the starting point in understanding funding of new capital intensive projects. The notion is that the financial market anticipates growth opportunities, if the financial institution or high net worth individual capitalizes on present value of growth opportunities by investing in projects that can sustain the market expectations. ( Raghuram G. Rajan; Luigi Zingales (1998)).
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