Setting Appropriate Milestones in an early stage startup

Seedcamp Partner, Carlos Espinal, has written this piece focusing on how to set appropriate milestones in an early stage startup. Seedcamp is Europe’s seed fund, identifying and investing early in world-class founders attacking large, global markets and solving real problems using technology. If you’re looking for funding, submit your details via their website at Seedcamp.com.

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When looking to plan for your company’s growth strategy or to go fundraising, it’ll serve you and your company well to break down what you need to do in terms of projected milestones. Technically speaking, I believe a milestone is a future ‘marker’ within your company’s stated growth trajectory.

Therefore, milestones, in the context of startups, are effectively points in time along the company’s timeline prior to a future event or goal. These points in time are usually defining points in a company’s history…  such as a key hire, a product launch, a certain number of users, a retention rate, first revenues, first profit, etc.

Rather than the goal itself (an example goal could be to create a successful, cash-self-sufficient company, that provides tangible value to its customers and is floated on the public market), milestones are a subset of ‘the goal’. As such, milestones of any size can be created throughout the lifetime of your company as it progresses to your company’s ultimate goal.

Milestones are important from a fundraising point of view because they can define whether a company is caught with little to show to potential investors at the point of fundraising or with a strong showing of what the company’s been able to accomplish to date.

Lets, for example, look at the following points in a company’s history (I’m making the timing up for example only, don’t assume these are ideal timings):

• Month 3: Minimum Viable Product
• Month 5: Private Beta Launch
• Month 8: Key Hire
• Month 11: Public Beta Launch
• Month 12: x% daily growth rate in subscribers

If a company knows how much money they need at all points in the timeline (see the article on how much money should I raise), then the question is which is the best milestone to fundraise on?

From an investor’s psychology point of view, risk is what is being managed. Minimization of risk while not losing an opportunity to invest in a hot company is the balance game that all investors play. Investors are constantly trying to find the least risky point to invest in a company relative to what they afford to invest (valuation) and the ability for them to invest (there is space in the investment round for new investors).

As such, the best time for a company to fund raise is either right before the completion of a key milestone or right after the completion of key milestone but before too much time lapses right after its completion such that there isn’t a sustainability of the reached milestone.

Let me explain. First, let’s look at the psychology of investing right before a key milestone is completed:

If an investor feels confident that the company is on track to hit its milestone, the investor knows that once the company succeeds, the company will inherently be more valuable to the outside market because it has been meaningfully de-risked by some amount. As such, the investor wants to ‘get in’ on the deal right before ‘launch’ for example, so that they can get a specific valuation while the company is still a little bit riskier, but not overly so.

This makes sense and is therefore quite simple to understand, but only companies that can instil confidence in potential investors of managing growth post milestone completion, generally get investors rushing to get this done. However, it’s a great for a start-up to be in, because generally, for things like a product-launch milestone, it is easier to control than say, a specific user growth rate.

Now let’s look at the psychology of investing post a key milestone being completed:

If an investor feels like he wants to ‘stall’ to see if the company is completed, or the number of users hit, etc.… then he is trying to effectively fully de-risk the investment before committing cash. However, he knows that being playing the cards this way, other players will also be on the table quite quickly because the company is not only attractive to him, but also to many others that were standing by the sidelines waiting to see what the company would do (relative to their risk profiles as in, this doesn’t mean that late stage investors, for example, will change their mind to invest in your company). Therefore, the investor in question wants to get in before the company is too valuable for them to invest in.

Therefore, the art of picking milestones is trying to determine which ones are the key ones to focus on.

As a rule of thumb, these are the biggest ones:

Human Resources  – Hiring key people that will make a huge impact on your organization (not just employees for workload purposes, but like a shit-hot marketing person, for example).

“In terms of team growth, I believe there are other significant milestones, where organization changes happen roughly every doubling in size:  founding team (usually 3 -5) expands to 7 -12, expands to 25-30, expands to 50-70, then above 100 and beyond. More often I see companies do quick jumps rather than continuous growth, and the jumps are always followed by significant growth management challenges.”*

Product – Product launches vs. version releases

Market – Market validation. As in, first customers, or first paying customers, etc.

Funding – Maybe some money being committed to a round that the investor in question can lead or participate in.

You can break these down into smaller and smaller ones if you’d like, but that’s where you start having to make judgement calls as to what is meaningful and what is not.

Other examples of milestones include*:

• Proof that you can work together as a team, usually historical evidence
• Proof that you can build something, i.e. working prototype
• Proof that it’s useful to someone – first users and clients
• Proof that you can talk to investors – every financing round, even small ones
• Proof that you can talk to audiences – 100k users or 1M users or 10M users…
• Proof that the initial team is able to attract talent – key hires are C- ad VP- level professionals, which will drive your growth further. Every startup will eventually need a functioning management team consisting of CEO, CTO, COO, VP Sales, VP Marketing, and possibly some others depending on what you’re building.
• Proof that ecosystem agrees with your ideas – bringing respected industry advisors or partnerships on board
• Proof that there is market – $1M annually
• Proof that you can manage your finances – cash-flow positive operation
• Proof that you can scale – $10M annually
• Proof that the market is big! – $25M annually and beyond

Just keep in mind, milestones are all about moving from one stage of risk to the next. As you start planning your fundraising strategy, you want to make sure you time it so that you have ample time to fundraise so that you are in control of which milestone your company hits when. You just want to make sure your fundraising strategy uses these milestones to your benefit and not get caught between them and stranded for cash.

* Additional Comments from Bostjan Spetic of Zemanta.com

Update Note from Nov. 11, 2013

You should raise as much money as you can, but at least enough money for you to accomplish your next most meaningful ‘validated’ milestone + some buffer funds to help you spend time fundraising afterwards. This means you should look at a variety of points across your company’s timeline to see which can be made into meaningful milestones.

Whichever country you are in, you will have different fundraising challenges depending on the mix of individual and institutional investors. In a country where the funding comes mostly from individuals, you will likely not be able to raise substantially large rounds, in countries where you have access to organised groups of individuals, you’ll have access to larger rounds, and in countries where you have access to many institutional investors, you will likely be able to raise the largest rounds.

If you want to go for really really big, you should go to the geography where you can get that meaningful amount. Otherwise you will be underfunded, regardless. Keep in mind that in those markets, costs of running startups are going to be higher, so you need to include that in your plan.. hiring star coders, for example, in the USA is very very hard these days.

In markets where you are not going to be able to raise the appropriate amount you need up front, try and articulate your requested amount this way: “This is what I need [big number], but this is what I can accomplish [milestones] with this [smaller number]”