Setting Milestones for a Series A

As commerce seed investors an important factor for us to consider is whether the company will be able to raise a later Series A. This isn’t a popular thing to talk about but it’s reality.

Why do we care? Because when you are a large investor in a seed round you are investing in a stage that has an expiration date. Seed investors rarely have the capital to fund a company through a 5-10 year growth cycle. This is especially true in commerce companies with physical products or operations.

We need to be cautious and minimize the probability of finding ourselves in a sunk cost dilemma 1-2 years in the future when a company has no traction, no cash and no potential investors.

We’ve been right about 60% of the time. It is still very early.

VTF Capital Seed Follow-On

Smart investors think of a company’s life story in milestones. Milestones are fundraising related, metrics related and product related and they occur at sporadic points in a company’s growth.

We have the same conversation with every founder we invest in. What’s the next milestone? What does the company need to look like at that point to achieve that milestone?

This is not an evaluation question but rather a collaborative one. It is natural for founders to want to do 4-5 things in the next year. In my view, it is better for a company to be healthy and growing in five years than for it to do 4-5 things in one. As an outsider I have the benefit of keeping that restrained view.

There are rare times when a company can do it all. But often the 4-5 things are aspirational goals a founder sets for the company. On deeper study, I’ve generally found that those 4-5 things are what the founder actually sees the company doing over the long-term. In the hype of pitching investors, he/she believes she must put it all on the table right now. It’s helpful to recall that humans are generally bad at estimating what they can do in a year.

But regardless of capacity, the question one must ask when setting milestones is whether or not all five things are relevant to achieving the company’s goals between now and the point of the milestone (e.g. end of cash runway).

Let’s say your vision for your company is to be the end to end marketplace platform for consumers who buy eggs. To achieve that vision you will build strong technology that manages:

  • egg production
  • egg distribution
  • egg retail sales
  • egg feedback ratings
  • payments for eggs

Today you have 20 farms and 400 retail customers and you are raising a $1M seed round. That money will last you 18 months.

The two things you want to focus on are:

  • What will the company do at the end of the cash runway?
  • What will the company need to look like in order to do that?

Fundraising stages, from early to late, exist on an investor motivation spectrum of faith to spreadsheet. The earlier the investment, the more the investment is a faith investment in the market and the team. The later the investment, the more the investor is concerned with spreadsheets. That is to say, for example, how their capital turns $1 of sales into $4.

If you are planning to raise a Series A, then you must consider what your company needs to look like to Series A investors at the point you need to raise capital from them.

Series A investors invest in both but are to the right of the midpoint preferring companies that show strong metrics-based performance. Yes, some Series A investors say they are more focused on the team and the vision than performance. This may be true for some but my experience in dozens of post-seed financings is that Series A investors overwhelmingly look at data first.

  • What metrics will matter to them?
  • What metrics will they use to determine if their capital can be used as an accelerant to growth?
  • Will your metrics demonstrate strong adoption and product market fit?

The more disparate metrics you have, the lower the probability your performance of each will demonstrate dominance (aka traction…a word I hate).

Investors can connect dots and see what’s possible. When deciding what the company should look like at the next milestone you should err on the side of highlighting your ability to execute.

You want to be able to say (using the egg example:

  • We set out to onboard and process retail orders for 2,000 retail customers. We did that and here’s the data. (note this is not necessarily a revenue/monetization requirement. We’re using an egg example where a successful transaction is someone buying an egg. Active users, participating users, etc. are similarly useful metrics depending on your business.)
  • The next step if for us to own these three parts of the market. You can tell that we can execute, you are investing in that growth.

Conversely you can say:

  • We want to own the entire egg market so we built the technology that does all of these things.
  • We have 100 retail customers, three distributors and are in final talks with 3-4 farms.
  • The market potential is about 50,000 customers and we have a plan to go after them. We have less than 100. But here’s our sales funnel. The ones noted as “pre-qualified” are ones I have email addresses for. I’m confident they’ll close. (this is a real example)

In the latter, the Series A investor sees undisciplined product development and mediocre results.

In the former, she sees restrained, patient product development, exceptional execution and demonstration that people want what you’re putting out.

For most investors, the former will be a better investment.

In my past life as a founder, I ~~just~~ knew I would raise Series A capital when I needed it. I never stopped to consider how.

At SHIFT we had exceptional technology to manage a large fleet of on-demand cars, bikes and multi-passenger buses. We were the first and still only outside company to build access control and telematics systems for Teslas and smart cars. We built the hardware and software in-house. Our customers could access one of 98 cars within five minutes using iOS and Android apps. Our backend automation systems powered a 24/7 recharging and rebalancing operation for an electric fleet in the largest centralized electric vehicle charging station in the US. We were a fantastic engineering operation. We demonstrated we could execute. If only our business goals were to be the best vehicle fleet operator on the planet.

I came away from meetings with large Silicon Valley VCs with a set of metrics related to the business we were actually in. “If you get to 5,000 paying members in 8 months we’ll invest $5M” one of them told me. “Show 4,000 paid transportation uses in three months and we’re in for $4M,” said another.

We were asking them to help us become a billion dollar company. The question they were considering was whether there was reasonable demand for this to be a billion dollar company. We presented ourselves a consumer transportation product, not a backend vehicle operations company. The funny thing is, we put 99% of our effort towards being the latter, not building traction towards demonstrating that we could actually build the consumer side of the business.

In the process of building great technology and a great operation I forgot to focus on what we needed to look like to the person who would get us through our next milestone. And by the time I realized that, I didn’t have two more years to build the company towards that outcome.

Be the founder that thinks this through. Proactively share your plans with your investors. It will help you separate the smart investors from the not.

Thanks to Will Young and Patrick Olson for reviewing drafts of this post.

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