by John Vrionis, partner at Lightspeed Venture Partners
I love it when entrepreneurs start a pitch with a “Big Vision” and end it with their how their idea will achieve “World Domination.” However, equally important is the ability for entrepreneurs to break down that path to world domination into realistic milestones that line up with funding rounds. Funding rounds typically occur in 18-month periods. Startups don’t raise all the money they are ever going to need to achieve the end goal in the Seed or Series A round. Think baby steps.
What’s critical for entrepreneurs to understand is that valuations for startups do not increase at a linear rate; they increase geometrically based on achieving the right milestones. The best entrepreneurs raise enough money to achieve a set of interim milestones and then raise capital again at a significantly increased valuation. It’s part art, part science. Raise too much capital at any given stage and suffer more dilution than is necessary – obviously not ideal. But raise too little capital and have too little runway to hit the necessary milestones – usually disastrous.
Set Quantifiable Goals
Working with our summer fellows recently on a “preparing a fundraising pitch” exercise, I had them define success for the next 18 months by setting milestones in three broad categories: product/engineering functionality, customer/user numbers, and, if applicable, sales (revenue) targets. The goal was to set quantifiable metrics to hit in each category and to reverse engineer how many people and dollars would be required to get there. Then they broke each category down into six-week sprints. In short, to determine how much money to ask for in the Seed round, or any round for that matter, reverse engineer the problem and break it down. Then give yourself a little extra cushion for the unforeseeable calamities that every startup encounters!
Investors at each Series of funding are looking for the startup to have achieved different milestones AND they are looking for a cohesive plan to fund the company long enough to accomplish the next set of critical goals.
As milestones are accomplished, overall risk of the startup failing decreases, which is why valuations (share price) increase. If a startup doesn’t succeed in accomplishing the key milestones in any given stage, the overall risk profile of the venture hasn’t decreased (in fact it may have increased due to a signaling of poor execution), so valuation remains flat, or worse, no more capital is available.
Again, every entrepreneur should be able to paint the picture of how her or his venture will achieve world domination, but it is critical to break the journey into “steps” that coincide with key milestones and funding events.
This journey is what investors want to understand, it matches how valuations increase, AND it enables the team to focus on a limited set of interim goals.
As a prospective investor, I absolutely need to hear that the ultimate plan is take Paris, but tell me what your Normandy is. How we are going to get to Paris, and how much money do you need to get there?
John Vrionis (@jvrionis) is a partner at Lightspeed Venture Partners who focuses primarily on early stage enterprise and consumer technology investments. In addition, John is the founder of Lightspeed’s Summer Fellowship Program. John holds an MBA from Stanford University Graduate School of Business, an MS in Computer Science from the University of Chicago and a BA from Harvard University.