Growth Milestones

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. Identifying, funding and achieving 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. Then we must make some estimations about the feasibility of funding 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

  • Functional prototype
  • First paying customer(s)
  • Beta customer(s)
  • Successful clinical trials
  • Proof of concept
  • Technical achievement
  • Product release
  • New feature release
  • Site goes live
  • Strategic partnership
  • Critical mass
  • Patent secured
  • FDA approval received
  • X number of customers
  • X daily average users
  • X dollars of revenue
  • X number of page views
  • X% repeat customers
  • X decrease in COGS
  • Hired rockstar CMO
  • Milestones and Risk

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Also covered in this chapter:

  • Use of Funds
  • Hit Movie Example
  • Building Equity
  • Airbnb Example
  • Negotiated and Time Limited
  • Seed Stage Valuations
  • Convertible Notes
  • Dilution and Pro Rata