milestones or millstones?

Posted by in Investing, Opinions

When we work within our businesses on growth capital strategy we don’t advocate the popular funding principles of ‘bootstrapping’ (UK) or at the opposite end ‘get as much as you can’ (USA). Instead we advocate a milestone based strategy where the company targets a capital raise that gives it sufficient leeway to achieve a substantial, transformative, milestone. Something that effectively proves the long-term potential of the early-stage business a little more.

To explain by way of example. Company A has a concept (milestone 1), has built a product (milestone 2) and has proven with a small group of test-clients (milestone 3) – often people/companies with some degree of connection to the entrepreneurial team. Milestone 4 for the company could be to show that the company can onboard a meaningful number of third party clients unassociated with the entrepreneurial team. A simple example but one which, if achieved, would somewhat prove independent demand for the product/service, derisking the business concept, and resulting in an increase in the valuation.

Note: one of the core premise’ of a milestone based strategy is that it helps to manage equity dilution by achieving substantial, measurable, step changes between fundraises. In other words, a £1m raise is achieved in two tranches rather than being invested in its’ entirety at the lower entry valuation i.e. £500k is invested at the milestone 3 valuation and £500k later at the higher, milestone 4, valuation.

In all instances you balance the milestones against a reasonable timescale – i.e. a minimum of at least 6-9 months funding and ideally 12 months – otherwise the team are constantly on the fundraising path. As a result one sometimes combines milestones.

Anyhow, the point of the blog wasn’t to describe milestones but rather, per the title, to warn against millstones.

A milestone becomes a millstone when it is a) poorly conceived or, more likely, b) overly ambitious. When defining milestones, ego often comes into play and there is a temptation to offer to deliver the World rather than a substantial incremental step. Whilst compelling on paper, and doubtlessly an attractive aide to that initial fundraise, the ambitious milestone becomes a millstone if it can’t be/isn’t achieved as, post-funding, the expectation of existing investors (and often future investors taking a watching brief as they consider the next round) is set high and delivery comes in below.

So what caution from all this? Just the need for careful consideration of ‘the achievable’. For Company A, onboarding 20 third party clients is arguably the same proof as onboarding 100 clients. The latter is undoubtedly more and undoubtedly better, but to achieve a reasonable valuation uplift one should consider whether 20 clients is enough and whether the extra 80+ should become part of the next milestone (e.g. milestone 5 proving the company can subsequently scale in a repeatable and methodological fashion).

There isn’t that much between a milestone and a millstone and – per our usual candour – we don’t always get it right. But we do know to ask ourselves the question and to endeavour to aim for the ‘achievable’ rather than the ‘blow the doors off’. Not to say we don’t try to blow the doors off, just that to smooth the fundraising path it is better to overachieve the reasonable than underachieve the incredible.