In the last Startup Playbook, we discussed the importance of creating a comprehensive capital raising plan. There are a few elements of the capital raising plan we will discuss in greater detail in the coming weeks, as each plays an outsized role in closing your investment round.
First up, we will discuss milestone plans (Tip No. 4 from our previous post).
Milestone plans are often overlooked because entrepreneurs tend to focus on the one giant, exciting milestone that drives them every day: build a big, badass, successful company. In between starting a company and achieving a glorious exit, there are many incremental steps that must be taken along the way. These incremental steps are the essential ingredients that will determine how the company raises capital and increases its value.
Every time you go to raise capital, you should have a detailed and finely tuned milestone plan. Let’s dig into what it should include and to whom this plan matters:
Elements of your Milestone Plan
When establishing your milestone plan, you need to answer four questions. The answers to these questions should be evident in your presentation materials, in your data room, in your words, and in the actions your team is taking.
- How will you use the money?
I love a good sources and uses statement. These are more common when investing in hard assets, like real estate or solar, but the concept is highly applicable to investing in a startup. If you are going to raise $1M (i.e., your sources), then tell me in excruciating detail how you will use that money (i.e., your uses). Common and very acceptable uses include hiring, technology development, building out a sales and marketing function, and intellectual property protection (i.e., patent filing). Another acceptable use: a few months buffer of capital–just don’t get too greedy as investors aren’t paying you to earn interest on their capital. Don’t feel beholden to specific categories as you build your uses statement, but you must be able to explain it. Most importantly, make sure your defined uses in your pitch deck align with your financial model and your sources (i.e. the specified amount you aim to raise).
- What will you accomplish?
With a clear plan for how you will spend the money, you must then ask what it is you plan to specifically accomplish from either a technical or commercial perspective. If you plan to use the money to hire three engineers and procure materials for prototyping, then be able to clearly explain what the outcome of those investments will be. Are you going to scale your prototype two times from the previous version? Are you going to get it out of the lab? If so, where are you taking it, and with whom? Do you plan on getting it in front of one potential customer? Or five? Or ten? Be very clear about what you are doing with the new resources you have at your disposal.
Public Service Announcement No. 1: Clarity is critically important, but so is flexibility. Build a strong plan and articulate with clarity, but make sure you leave yourself some room to pivot from your plan without upending your business or upsetting your key stakeholders. Not everything will go as planned, and you need to give yourself some room to address these unexpected challenges.
- How long will it take?
The benefit of being very clear with what you’re doing is that you can then articulate with confidence how long it will take, and good investors will hopefully share your confidence. The time it will take is your runway between this investment round and either (i) the next investment round or (ii) the time it will take to get to sufficient profitability such that your cash flow can support future growth. Your defined runway should align very neatly with your financial model and your operational plan. If you are focused on technical milestones, then be clear about how long it takes to test, learn, and improve upon your product. If you’re moving towards commercial milestones, be honest and tactical about the sales cycle and how long it will take to secure those pioneering customers. Either way, this temporal question is a sneaky important one for climate tech companies because most will need to raise different types of capital (i.e., project finance) as they scale, so early-stage investors will want to understand potential pathways and time horizons to reduce a company’s cost of capital. A clearly defined runway will give investors confidence that you–the founders–are prepared to lead the organization through this next period and beyond. Ambiguity or an unclear runway will lead investors to question your plan and your goals for this round. For some investors, these doubts will be enough to pass. For others, they may still invest, but they may prefer to do so at a lower valuation because they anticipate you will need a bridge round (i.e., more of their capital) to achieve your goals.
Public Service Announcement No. 2: Give yourself some extra time. Everything in life takes longer than we expect, and the worst thing you could do is run out of money right before reaching that critical milestone.
- Why does it matter?
The most important question of all. If you’re going to raise all this money and spend it, then you need to clearly explain why all this work will result in the company being worth significantly more at the end of your runway, such that you can raise your next round of capital at a notably higher valuation. If you give investors this confidence and you’re building a business in a large addressable market, then you’re likely to raise the venture capital that you need. Spend some time thinking about your answer to this question, especially if your plan is primarily based on technical milestones. When you’re raising on technical milestones, you need to articulate–often to folks who are not PhD’s–how you will simultaneously de-risk the technology and strengthen the case for commercial application of your product. Answer this question and you’re well on your way to raising your investment round.
For Whom Is This Plan Important?
Never end a sentence in a preposition and recognize that milestone plans are critically important to multiple stakeholders:
- For you:
As the founder or founders of this company, it is necessary for you to have tools that allow you to successfully manage the business. A milestone plan can be a great tool, especially when it comes from separating the forest (what you will accomplish over your entire runway) from the trees (the daily chaos of running a startup).
- For your team:
A great milestone plan can easily translate into clear goals for your team. You can tie those goals directly to the prospects of raising future capital at a higher valuation, which should matter a lot to your team members who hold incentive stock options in the company (ostensibly at the same or lower valuation than your last round).
- For your board:
Boards only meet a handful of times a year. You need a story arc to connect board meetings together, to keep board members engaged, and to focus everyone on growing the business.
- For your investors, both current and prospective:
Like any plan, the best milestone plan is one you can meet or beat. Creating a strong milestone plan will help you secure your current round. Beating that plan will result in a serious vote of confidence from your current investors (remember, so few of their portfolio companies will beat their plan) and be an amazing advertisement for your future investors (also remember, all investors talk). Beat that plan and the momentum will seriously build!
- For your brand:
If your milestone plan includes a meaningful public step (i.e., our first commercial deployment), then sharing this accomplishment with the public can be a strong way to build brand equity, especially in a time when many climate tech startups are getting mired in either the technology development or commercialization valley of death. You have to take advantage of every one of these moments you can get!
A great milestone plan won’t ensure success, but it will definitely play an important role in it. They also create great time capsules you can look back on years down the road to capture your beliefs at various stages of the business. But let’s not get too ahead of ourselves. There’s much more work to do before you can be walking down memory lane as you sit on the precipice of an IPO.
If a milestone plan is a critical piece of the capital raising puzzle, so is understanding the type of capital you intend to raise, and that’s where we’re heading next in the Startup Playbook.
