milestones and cheese

Posted by in Investing, Opinions

I have found myself referring to milestones a lot recently. A word that resonates for me, is common parlance in investing yet like many things might not be clear to all.

Milestones, for me, relate to strategy. Certain points in a business’ life when an event, or events, conspire to deliver a transformational change in that company. A series of identifiable short and medium-term initiatives that, in isolation or combination, change a business substantially. In the investment world this would typically mean that at a certain milestone a company is either proving a certain point or is potentially de-risking its’ business model and hence investment risk.

Most strategies can be divided into a series of reasonable milestones. The benefit of this is not only that of having a series of definable initiatives to direct short term effort against a long-term strategic goal, but moreover that good milestones (through either proving a point and/or derisking a business per above) can have the effect of increasing valuation and, as such, reducing equity dilution for the management team.

Considering a capital raise in light of milestones is reasonably enlightening for all. A key benefit is that it enables an eloquent answer to the question “Why are you raising capital” as the answer is informed by “I am raising capital in order to achieve X, Y and Z, over [this] time period, which will……… and as a result will prove…..”. It also gives focus on what capital is really required in the short-term to achieve such milestones.

I have seen a few plans recently loaded with cost in areas that, genuinely, are great but make no substantive difference to the company. Call it non-value accretive spend (or spend that could have been deferred to when the valuation was higher and the dilution would be lower). In an environment of tight cash control and minimising dilution that’s a waste.

By way of analogy, call it filling your cheese shop with more and more great cheese without spending any time making people aware of where your shop is. Great to have cheese but ultimately pointless being the best supplied cheese shop in the World if cheeselovers can’t find you. Much better to invest in enough cheese to be a great cheese shop and the rest in marketing to drive footfall. Proving that you can both stock great cheese and sell great cheese (milestone achieved). Funding is then to buy more cheese and drive more traffic to sell more cheese to more people. Big step forward and de-risked. No cash wasted on stocking too much cheese too early when the critical next milestone is selling some of the damn stuff. Raise capital to buy cheese without having proven sales and your valuation will be lower than raising capital to buy cheese when you have already sold cheese. Sorry for that!

The key is also to raise enough capital to take you through a substantial milestone and slightly beyond (I’d say at least 3-6 months beyond). Why? Such that you factor in the unknown and also that you factor in sufficient time to raise further capital off the back of the last milestone.

A neat trick of course is to inform potential investors of the milestone you are in the process of delivering, inform them of your progress as you head towards it and then have them excited to invest as you hit it. They’ve been on the journey with you and will have increased confidence in your capabilities. The challenge, and hence the title of this blog, is to make sure the milestones don’t become millstones in this instance. You’ve got to make sure the milestones are realistic and achievable, otherwise non-delivery will have the entirely opposite effect on fundraising prospects and will drag you down. You will rock rather than build confidence.

The point of this? Well thought through milestones are effectively an overlay of strategic goals against cashflow/budgeting. They benefit investors by providing focus on what can be achieved with investment and benefit entrepreneurs by limiting fundraising to the cash they actually need. There is no rulebook as to how far apart milestones should be, scale, size, duration etc….. everything is business specific. They do however, theoretically, help focus risk for investors and reduce dilution for entrepreneurs.