Perhaps the most important strategic concept for maximizing financial returns in a venture capital investment is milestones. Any time a milestone is hit, the underlying valuation of the startup increases, just as a public company’s stock price rises when the company hits its numbers. Setting, funding and hitting milestones are imperative for creating value in a venture.
Each milestone is tied to one or more key risks. Hitting a milestone results in demonstratively lower risk, which translates into higher valuation. Though there are some shared characteristics across all startups, every industry has its own set of inherent risks. Biotech companies, for example, will have vastly different milestones than software startups. The challenge for venture capitalists is to identify key risks in a startup and determine whether there are milestones the startup could achieve to mitigate those risks. The second part of that challenge is to fund the activities required to hit the milestones.
For example, a software startup may have beta testing, new feature releases and/or strategic partnerships to forge. Biotech companies have regulatory and approval processes. Hardware companies build prototypes and release products. Young founding teams need to recruit seasoned executives; experienced founders may need to bring in young, energetic talent. Most startups will benefit from many of the achievements listed, and it will be the job of the venture capitalists to figure out which of the activities should be funded with a round of venture financing.
|Example Milestones||Also covered in this chapter:|