The Challenges of Milestone Funding
As all of our clients (and anyone who’s ever spoken to me!) knows, I am a huge, huge fan of milestone funding. That is, when you’re looking for investment capital, you first identify your milestones and then calculate how much capital you will need to raise in order to achieve these milestones. This is the best wait to determine and articulate how much capital you will need. Investors like milestone funding as it makes clear how much money you will need and what you’re going to do with it (which inspires confidence that they will see a return on their investment). It also helps to keep you on track, and, because it keeps you from raising too much, it keeps your dilution as low as possible.
That said, there are some challenges to milestone funding (not least of all actually securing the funding!). But if you’re prepared for the following challenges, milestone funding will serve you very well.
1. Defining your milestones. Establish milestones that are significant for you as well as for your potential investor. Don’t sacrifice your goals to appease an investor and close the deal. Identify your short-term goals and what resources you will need to achieve them. Also make these milestones finite without too many dependencies as this can get confusing. You want to know and agree upon exactly what your milestones are so that you—and your investors—will know when you hit them.
2. Timing your milestones. Milestones are intended to be short-term. If you place a milestone too far out into the future, it defeats the purpose. We all know how quickly things can change with startups so you don’t want to limit your options from the get-go with extended milestones. You should be focused on short-term goal achievement. Longer-term milestones may look like they make good sense at the outset, but they are likely to become unrealistic—or not make sense—at some point down the road.
Contact Early Growth Financial Services for help with financial planning and setting milestones.
3. Resetting your milestones. You may not always get your milestones right. You may find yourself, in the build-measure-learn feedback, receiving information that supports a pivot. Or market conditions may change suddenly. In that case, don’t be unnecessarily wed to your milestones at the expense of your company growth. In other words, don’t lose the forest for the trees. It’s perfectly acceptable to reset your milestones. Just make sure that you keep your investors informed so that they don’t feel like you are reneging on your commitment to them.
4. Being constrained by your milestones. Some entrepreneurs may feel constrained by milestones, thinking that the process and structure which goes along with the business planning around setting these milestones and then the work of achieving them is constrictive and a hamper to innovation. I simply don’t believe this. Milestones aren’t albatrosses around your neck—you’re not working to them just for the sake of working to them. You’re working towards them because step by step, this is how you grow a successful company.
Identifying and setting milestones isn’t just a way to put on a show for investors. Milestone funding helps you to organize yourself and come up with a working—and workable—plan.
Do you practice milestone funding? Tell us about experience in comments below or contact Early Growth Financial Services for helping setting your milestones.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides early-stage companies with accounting, finance, tax, valuation, and corporate governance services and support. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.