Q. Dear Zenagos, if you take money from VC’s, what happens if you don’t hit your milestones?
If your relationship with your Venture Capitalists (or “VC’s”) is great, then you can miss a milestone and move on. However, if you’re already on thin ice, then a missed milestone can be the excuse to shut your venture down. So, as with most things in life, the answer is: “It depends.”
What is a milestone?
For a venture-funded startup company, a “milestone” is a significant achievement, an accomplishment that represents proof of your venture’s overall viability. Milestones are often tied to funding, with the next batch (or “tranche”) of investment money promised only if the milestone is reached.
What’s an example of a milestone?
For a product offering, an early milestone might be producing a working prototype of the product. For a service offering, an early milestone might be signing the first contract with a branded customer. It needs to be something that serves as proof that your business concept is working, that your business model is viable. Reaching the milestone should provide a meaningful increase in your company’s value, thus justifying further investment.
Why do VC’s set milestones?
Milestones serve several purposes. One of the most important is that a milestone is a communication tool. By setting the milestone, the VC tells the entrepreneur what is most important to investors. The entrepreneur may be motivated by something else entirely (tinkering with a cool product, changing the world, getting famous), so the milestone serves as a stark reminder of where the company needs to focus in order to survive.
A milestone also sets expectations. Entrepreneurs who hit their milestones have a reasonable expectation of receiving the promised follow-on investment. Those who don’t hit their milestones cannot expect continued support, at least not at the same price or the same funding level. A missed milestone essentially opens a new negotiation.
What happens if you don’t hit a milestone?
Exactly what happens depends on a lot of variables. Some factors will reduce the impact of missing a single milestone:
If your business idea has tremendous potential, then your VC’s may be more flexible around your milestones. An entrepreneur whose business builds a significant competitive advantage (or “moat”) may get more leash. A business that could become massive or dominate a valuable niche may also be given more rope.
A serial entrepreneur with several proven successes or a previous big company sale (or “exit”) will typically be extended more courtesy by investors. For such an entrepreneur, milestones may be treated less literally, since investors use track record as a primary indicator of the resilience of a management team.
If your business is showing significant signs of progress, then VC’s may decide that the milestone itself is less important. Everyone knows that the initial launch plan will have flaws, that there will be unanticipated problems. But if you have achieved a great deal, you will get some leeway, even if what you have achieved wasn’t exactly what the milestone described.
If the economy suddenly changes or, for example, moves into a recession, a VC will usually take this into consideration and renegotiate the milestones and targets. He or she might ask you to move into cash conservation mode, which could delay hitting certain milestones.
Frankly, you will probably be given the benefit of the doubt if your investors like you. An entrepreneur who is fun to be around – an inspiring person or a dynamic force – will win more opportunities than someone with a poor attitude or dour demeanor.
The worst case if you don’t hit a milestone is that the VC’s will decide not to provide follow-on funding, which may force you to abandon the venture. If you can’t convince them to give you a little more time, you may be able to find other investors to sustain your effort.
Missing a milestone moves you off a relatively certain path and into an uncertain future. Your best strategy as an entrepreneur is to build a strong relationship with your investors and to communicate with them early and often. You may feel that being transparent will bring unwanted input and interference from your investors, and it certainly may. However, if you need your investors’ money, then you need them to feel fully bought in and committed. Keeping your investors informed and included will increase the probability that you will get a second chance when you really need one.
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