The Importance Of Milestones In Fundraising

Carlos Eduardo Espinal is a large figure in the European startup scene. As Seed Investor and Partner at Seedcamp he has invested in, or has lead the investment in, over 200 startups. In 2015 he published Fundraising Field Guide: A Startup Founder’s Handbook for Venture Capital, an excellent treatise on how to get money for your startup.

Chapter 2 of the book addresses the value of communicating milestones achieved, such as the hire of a senior marketing executive or hitting 10,000 monthly users. These accomplishments act as signals. They are ways of demonstrating you are on the track to success.

Leveraging a milestone to encourage angels or VCs to sign is a powerful tool and may seem simple, but there is a nuance to it. Espinal explains this from the point of view of the investor:

“The challenge to an early-stage investor is to balance investing in your startup before you [the founder] are too far along in your progress (and thus merit a higher valuation) and coming in too early in your journey (and risk losing it all). All investors strive to minimize risk without losing the opportunity to invest in a hot company. Investors are constantly trying to find the least risky point at which to invest. As such, some of the best times for a company to fundraise are either right before or right after the completion of a key milestone, but before so much time passes that the recently achieved milestone is no longer impressive.”

In other words, it is as a matter of helping the investor derisk the investment. For example, if a company is close to hitting their targets, the chances of them failing are relatively low. But once they announce publicly their achieved goals, the cost of shares in the company will increase, making the risk once again significant. Therefore an excellent strategy is to get signatures just as you’re approaching a milestone. The author explains how this is easier said than done:

While [getting signatures before you hit a milestone] makes obvious sense, only companies that instill a strong confidence and “fear of missing out” (FOMO) in potential investors regarding the company’s growth post-milestone completion can get investors rushing to get this kind of deal done.

On the flip side, some may want to invest only after your target is hit. In this scenario, they want to see the immediate effects of the event. For example, the expectation of growth after a new hire or product launch. They also may be waiting for others to come on board.

To be clear, milestones for investors are not always the same as internal milestones. Espinal explains the 4 types most relevant for angels and VCs:

  1. Human Resources. When you make a key hire that will have a major role, typically someone in a senior role of CEO, CTO, COO, VP of Sales or VP of Marketing. This demonstrates your ability to attract talent and ‘stand on the shoulders of giants’, so to speak.
  2. Product launch. Or feature releases that will have a significant impact on how you grow your user base or monetise.
  3. Market validation. Every company has a one metric that matters, the one number that is most important to them. This can be daily active users (eg. 100,000) or monthly recurring revenue (eg. $1 million) Hitting round numbers here is solid proof of your ability to grow.
  4. Funding and Partner agreements. If you sign off on a big corporate deal that signals success. Likewise, confirming other investment, no matter how small, can signal to bigger firms that you are capable of getting people to bank on you.

You should also keep in mind that different investors have different values as to which objectives are critical. When discussing your path with them, query as to which are important to them, but don’t stray too far from your vision. You will need room to pivot, which brings us to a final caveat. Don’t make investment dependant on hitting goals. This is known as investing in tranches. Espinal explains why this is bad:

If you consider a tranche as a glorified milestone, adhering dogmatically to it early on could have a negative impact. Why? Well, because endeavoring to meet the scheduled conditions may constrain your company’s growth options, even if midway through executing your stated strategy it turns out that it was a bad idea for the company to have the goal agreed upon for the release of the tranche.

Fundraising Field Guide is a short read full of practical advice which I highly recommend. If after reading the excerpts above you’re feeling energised, the next section is crucial for understanding how to manage your time effectively to make sure you hit your goals.