February 25, 2020
Recently, I’ve spent a bit of time talking to start-ups and trying to help them think about future funding rounds vs progress. Typically, all of the information about funding, features and milestones is broken up into different documents. I started to think about how this information could be presented in a simpler format, that would give investors a snapshot of what’s going to happen in a similar manner to the Business Model Canvas. I started to draw out the below image because I think visually and it helps to think about funding rounds.
While the image is relatively simple, there’s a bit to unpack. The first layer is the three key levels that are important for the businesses that I’m looking at (early stage from Seed to series A); Product-Market Fit, Scaling, Growth.
In the first phase, I’m looking for evidence that the company has found their market and there’s demand for what they’re creating. This could be compared to building an engine. You might not have a lot of gas in the engine but you need to demonstrate that it works. If you were to feed it a bit of gas, you’ll start to see all of the moving pieces together as it generates power.
The second feature is scalability, this is moving towards the pre-series A or A round, where a company has proved the idea and they’re scaling it, it might not have sustainable unit economics but the track to get there is either evident or becoming evident. Continuing the car analogy, this is dropping the engine in and pouring some fuel into the tank to take it for a test spin. As you begin to put your foot on the gas, you should be able to see a commensurate boost in power generated.
The final stage is the growth stage, where a company is able to prove out profitable unit economics but may not be profitable at the bottom line because they’re still putting everything they can into continuing to grow their market. This is where you’re fine tuning the car to create more torque and power while at the same time expanding the range that it’s able to achieve.
I’ve seen these concepts broken down into Team, Product, Repeatable Sale and Unit economics before as well. I also like this breakdown but for the purposes of what I’m trying to demonstrate, it’s probably easier to stick with three stages because a lot of the time the team and product come together at a similar time.
The first thing that you need to do is work out what you need to raise at each stage to be able to hit a sufficient number of milestones that will allow you to easily raise the next round of funding. To determine that amount that you need to raise, you need to work out what features that you need to build into the product at each point. Typically, this product roadmap might be a separate document or it could be iterative and determined by customer demand.
If the roadmap is determined by the latter, then it could be useful to start by looking at the milestones that need to be achieved at each level to get the next level of funding. This will likely be a second derivative of sales, something like customer sign-ups. When we look at how that metric expands in each phase, it might be a customer leads increasing 5-10x in each funding round, then we want to ensure that it’ll have a sufficient amount of growth to justify an uplift in the valuation at each round.
Setting milestones will help you measure what’s important. It’ll give you something to report to shareholders and other stakeholders and it’ll give you an early warning system if your growth engine is no longer packing the same punch as before. If you determine the milestones that you’re going to pursue earlier (and you’re welcome to change these if they’re no longer relevant) then you can also direct investors to these metrics. If you don’t have any metrics that you direct investors to, then it’s likely that investors will want a massive amount of information and might try to parse some metrics that may or may not have any bearing on the success of the business.
Once you’ve determined what you need to achieve at each level, you can begin to consider who you need to make that happen. If you know how many people you want to hire, you’ll also likely have some idea about what the market rate is for each of those hires. If you’re a successful cheerleader and able to get talent at below market rates then this will be a benefit at this stage.
Now you can sense check it all, would you be able to build each product/feature or service the given level of clients at each level of funding? Will the funding be sufficient to hit each of the milestones and maintain momentum? The execution will be a moving feast as some parts of the company might need to grow faster than others but as long as you’re still moving towards your metrics, then it’s likely that it won’t impede your ability to raise the next round of funding.
As I mentioned previously, while you may have all of this information in different places. If it’s consolidated into an easy to digest snapshot, it’s likely that you’ll have more success in hitting your milestones and also in convincing investors of your grand plan. Investors at the earlier stages won’t spend as much time in a business as the founder, they won’t be able to appreciate all the nuances so sometimes it’s better to show them what they should be focusing on.