As boring as it may sound, investors want to see an actionable plan and not just a vision and big picture strategy. As you embark on the process of raising capital, you must have an annual operating plan which includes your budget, headcount plan, and key milestones.
Since raising capital is a process that takes several months, prospective investors will meet with you at least three or four times before investing. On each of these meetings, they will want to see progress toward your goals and accomplishment of key financial and non-financial milestones.
Measuring and explaining results builds trust and a track record.
Once an investor believes that you have an idea and business model that makes sense, they need to be convinced that you are the right leader and you have the right team to pull it off. Part of this is based on timing and how your solution is intersecting the market opportunity. The other part is how you and your team execute. You need to establish a track record of success against milestones to get prospective investors to write a check.
In business and in life you are sometimes faced with unforeseen and unfortunate events. Under these circumstances, you will need to revise the milestones that you established in your plan. There are many reasons why this could happen -- some inside your control and others outside your control. Investors are just as interested in your explanation of missing a key milestone and how you are reacting to the miss.
Setting the right key milestones is key.
How do you know if you are executing your plan successfully? You need to measure results -- particularly the ones that are most important to prospective investors: those that reduce risk and increase value. Key factors for reducing risk -- especially in a startup or growth company -- include:
Status of Product Development:
- Alpha phase - you can demonstrate your product in the lab, but it isn't ready to sample to customers
- Beta phase - you are sampling it to customers but it's not suitable for going into production
- Minimum Viable Product - suitable for sales into some segments, and great for getting validated learning from customers
- Product in volume production with multiple customers
Status of Your Revenue and Business Model Validation:
- Development revenue: development money from consulting, non-recurring engineering, or some type of research revenue from strategic partners
- Grants: development funding from the government
- Revenue for your initial product from a single customer
- Revenue from multiple customers (customer diversification) which, when it reaches critical mass, allows investors to understand key metrics like customer acquisition cost, lifetime value of a customer, customer churn, and monthly recurring revenue
- Revenue from multiple customers in different market segments (market diversification)
- Revenue from additional products (product diversification)
Mitigating risk increases value and likelihood of outside investment.
As a company makes progress in establishing its business model, it reduces risk, and thus increases valuation. Here are some key risks that investors consider:
- Product Risk: Does your product work in the target customer's application how you promised and how they want it to work?
- Market Risk: Validating the size and growth of your target market by winning a critical mass of customers purchasing products.
- Product-Market Risk: Validating your business model including revenue, gross margins and operating margins at levels where you can reasonably extrapolate a financial picture that validates your business model assumptions.
- Competitive Risk: Beating competition, substitute products, and new entrants validates the strength of your competitive position in the market.
- Operational Risk: You can scale product deployment manufacturing with high quality and reliability. There are few customer complaints, and none that disrupt product sales.
- Legal Risk: Are you being attacked through litigation? How is the risk assessment on this?
- Intellectual Property Protection Risk: You have done a good job protecting your IP with patents, trade secrets, copyrights, and trademarks. Have you adequately used Non-Disclosure Agreements?
- Employment Risk: Do you have excellent human resource policies, government compliance, training, employment contracts, non-disclosure agreements, proprietary invention agreements, and executive employment agreements?
- Team Risk: Do you have a strong team with key core competencies and advisers with credibility, functional, technical, market and domain expertise?
All of these things show that your company has less risk, especially if your target customers are potentially large and growing fast. Valuation increases in step functions -- and each of these risk reductions increase valuation.
Smart investors will track your progress towards your key milestones. Meeting milestones also establishes a track record and builds trust. Establishing credibility is essential with investors.