Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs – Know Your Start-up Company’s Funding Requirements and Associated Significant Milestones

As part of the funding process, entrepreneurs need to spend time delineating their start-up company’s funding requirements and associated significant milestones. These items are one of the first things potential investors review. In addition, having mapped these significant milestones to your anticipated funding rounds is a key to gain credibility with your potential investors. This article outlines various items entrepreneurs need to consider regarding their funding requirements and associated milestones.

Delineate a Detailed Development Schedule

As part of a complete business plan, entrepreneurs must delineate a development schedule for their start-up company’s technology, product or service offering. This development schedule must be based on realistic assumptions, such that it is not only believable to the start-up company and its team, but it must also pass the scrutiny of potential third party investors and their consultants. Therefore, it is important, as an entrepreneur, that you take the task of delineating a detailed development schedule seriously. Any misrepresentations, or items in your start-up company’s development schedule that do not make sense to the investors and their due diligence team will cause them to question your credibility as an expert in your industry, as well as your start-up company and its management team. Remember, investors at this point, are looking for reasons not to invest in your start-up company, and so any upfront inconsistencies in the details of your development schedule will give them a reason to move on the next investment opportunity.

Identify Significant Milestones

Once you have completed a detailed development schedule, your next step is to review it from a funding requirements point of view. Here, you need to determine what the significant milestones are for your start-up company’s technology, product, or service offering. This can include items such as the following:

  • Technology simulation completed,
  • Completion and delivery of prototype, 
  • Alpha testing completed,
  • Beta testing completed,
  • Second prototype developed and beta tested,
  • Production units completed, and
  • Delivery of first production units.

Your start-up company’s milestones may be different, but the key here is to identify the significant milestones associated with the development of your technology, product or service offering. Here, investors are looking for points in your start-up company’s product development cycle that add significant value to your company and that at the same time can be used to increase your company’s valuation for subsequent funding round, as necessary. It should also be noted that development milestones should necessarily include both business and technology milestones. Remember, you are in business to secure customers not just to develop a technology, product or service offering.

Determine Your Total Funding Requirements

Once you have completed your development schedule and identified your significant milestones, you must review your start-up company’s financial pro forma statements to determine your company’s funding requirements. Here, reviewing your cash flow statements is a key to determining your company’s total funding requirements and the associated timing of this funding. This is where most start-up companies have some issues and it may require you to secure external help to both develop your financial pro forma statements (Income Statements, Balance Sheets, and Statement of Cash Flows), and to review and delineate various funding scenarios.

At this point it is important to develop several financial pro forma funding scenarios including:

  • Best case scenario,
  • Typical case scenario, and
  • Worst case scenario.

Each “case” scenario needs to be developed to include both internal (development) and external (market) driven factors, both of which will affect your company’s projected financial pro forma statements and hence the funding requirements for you company. This will take a significant amount of time and effort, but, in the end you will have developed a complete picture of your start-up company’s funding requirements. Finally, each funding “case” should include a complete list of the assumptions that go along with each scenario. This type of financial analysis and presentation will earn you credibility with your investors.

Map Your Development Milestones to Your Funding Requirements

The next step is to “map” your significant development milestones to your funding requirements. This can best be presented in table form or graphic form. This mapping provides your investors with a complete picture of the funding requirements of your company and the associated significant milestones. Many first time entrepreneurs do not go through this step and it generally will provide difficulty when it comes to investors wanting to understand the value of your company at the various points of its development. So, spend time reviewing your significant milestones and mapping them to your funding requirements, this will provide for smoother discussions with your investors.

Be Flexible

Once you have identified your significant milestones, determined your total funding requirements, and mapped these two items, learn to be flexible with your potential investors. Very seldom does the original funding scenario (e.g., $10M of total funding in two funding rounds – $4M and $6M) that you envisioned for your start-up company, or that you have mapped out in your business plan, come to fruition as presented. This can be for many reasons, including, but not limited to:

  • Your potential investors may only have a small amount of money to invest (e.g., angel investors),
  • Your investors would like to see your product’s significant features, functions, and capabilities proven out, before they invest more money,
  • Your investors have concerns over your company’s ability to secure market traction and would like to see your company secure a lead customer before the next round of funding.

All of these items and an infinite number of other concerns and issues will dictate your company’s final funding rollout scenario. The key here is to be flexible. Having gone through the details of your start-up company’s significant milestones and total funding requirements, it will then be easy for you to support any funding scenario that comes your way. Also, in reality, it may be beneficial for you and your company to entertain other funding scenarios, than originally envisioned. As a result, this may require you and your team to give up a smaller amount of total equity in the long run, and enhance your company’s future valuation in follow-on rounds of funding.

As outlined, spending a significant amount of time developing a detailed development schedule, identifying significant milestones, determining your total funding requirements, and then mapping these milestones to your start-up company’s funding requirements is key to securing funding from third party investors. By doing this work upfront you are guaranteed to increase your credibility with your potential investors. This will also ensure smoother discussions with your investors, once you move forward in the due diligence process.

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May 4, 2009 - Posted by | Business Planning, Business Plans, Venture Capital, venture finance

1 Comment »

  1. Thank you for the information. You have answered some questions that have come up while writing a business plan.
    I appreciate your efforts.
    Jackie

    Comment by Jackie Rainford | March 31, 2010 | Reply


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