Creating Financial Milestones for Fundraising

The following is adapted from Takeaways: Secret Truths from Leading a Startup.

East Coast investors have a reputation for being more cautious than those in Silicon Valley. Though caution can often be painted as negative, it can instead be a sign of wisdom and self-restraint. After three years in the Valley, I certainly became more cautious in my fundraising practices—especially in calculating realistic requirements. 

Building a Story of Milestones

While preparing a pitch deck for Series A funding in March 2016, I received valuable insight from my college friend, Nick Gillette, who works for the Washington, DC-area venture capital firm SWaN & Legend Venture Partners (whose founder, Fred Schaufeld, was one of our early investors). Nick wisely reminded me that the best fundraising is built around a “story of milestones” as opposed to “feeding the beast” of Silicon Valley. 

In an email, he wrote, “I would try as much as possible to build a story of milestones. We see so many companies that post projections and only forward-looking statements, and 99/100 of them will fail to meet them. What I’m really interested in: where are you today, what milestones will you achieve with the money you are raising from this round, and how will achieving those milestones prepare you to raise your Series B, and how can you give me confidence that you will achieve those milestones?” 

Ironically, as a result of our Scrum process, we were focused on short-term, mission-critical goals and objectives for product, market development, and sales. Yet when it came to fundraising and finances, we pursued much broader, less specific goals with longer time frames. Luckily, Nick reminded me to focus on the story, not just the facts.

He also made me think about VC investment strategy, about how when they invest in one round, they are infusing the business with capital while also putting aside financing for the next round. Because serious investors have done dozens of deals, they have a seasoned perspective on the next round and often know more than rookie entrepreneurs.

How Effectively Do You Use Capital?

Unlike entrepreneurs, VCs are less concerned about the “runway” (when the money runs out) and are instead focused on how effectively a company can use capital at various phases of a business life cycle. If you prove yourself by using investor money wisely and effectively throughout the cycle, they will remain strong boosters who recommit for future rounds—and even future business ideas.

Nick closed his email to me with more good advice: “I try to think of startups as many tranches (or slices of business development). You need money for one tranche; that gets you to the next tranche. I’m not saying you haven’t included those items in your pitch deck, either; just want to let you know what I’m really interested in when looking at these things. Hopefully that small piece of advice makes sense. I think it’s really important to keep in mind.”

Armed with Nick’s insider perspective and the wise advice of other experienced investors, we readied our pitch with hopes of winning more investment. I understood that this first test was only the gateway to a gauntlet of increasingly challenging obstacles, but we were ready to compete.

To prepare my team, I wrote this email summarizing my conversations with Nick:

It is not just about raising money. It is about ties into smart money. We should have different goals for each horizon. When a VC firm invests in Series A, they are already putting money aside for Series B and Series C. We need to set goals and achieve those goals. If we succeed, we’ll get the next set of investments. To have a future, we must succeed at every phase now—market exploration, market fit, customer acquisition and retention, etc. It is critical to understand what you are doing with capital at every phase. It is key to hit their metrics and get onto the next phase. If we are not meeting expectations, we will run out of money anyway and lose our company. By raising money by tranches, the investors are giving us a chance to prove ourselves one phase at a time rather than looking at a single final outcome at the end of the round. 

If you create financial milestones and follow through on them, you’ll prove to VCs that your startup is worth their investments. 

For more advice on funding a startup, you can find Takeaways on Amazon.

Brian Friedman is a millennial entrepreneur who went from a blank sheet of paper to a successful multimillion-dollar exit in less than three years. During this time, he secured over $2.5 million in angel and venture capital financing, hired more than ten employees, opened  offices in San Francisco and Taiwan, and sold global brands like Intel, Cisco, Castrol, and Box. His ideas about analytics and business practices have been quoted in TechCrunch, Yahoo!, Forbes, and other leading publications. He started the largest Wearable Technology Startup meetup in the US and now serves as VP of digital innovation on the executive team at Aventri, a leading enterprise cloud-based, event management software company.