Contrary to popular belief investors don't want to run your business. They aren't interested in the day to day operations of your business. It's YOUR business. Granted investors are part owners but if they wanted to run the business they would have started it themselves. They have invested money into you and your team to "execute" and create the return you promised in your pitch and meetings leading up to the investment. If an investor is in your day to day business then you've not executed. You have not hit the milestones set forth in your plan.
If you know what milestones are and use them then you will think I'm crazy for mentioning it but I see so many entrepreneurs that ask for a boat load of money but have not developed a solid execution plan for spending the money. My favorite pitches include...
- We need $X,XXX,XXX (note the number of commas)
- We need $X,XXX,XXX although we don't need it all at once. We can phase it in monthly.
- We need $X,XXX,XX. That includes six months of reserves in case we have problems.
What each of these are missing are milestones. Milestones are points in the future by which certain activities will be completed. These milestones often are tied to when funds will be released to you. In the book A Good Hard Kick in the Ass milestones are described as "Value Inflection Points". Value inflection points are points in time where certain activities have been completed...these activities have "added value" to the company and you are ready for funding to take you to the next value inflection point. At each of these points, because of the activities you have completed, your business is worth more and your valuation has increased (that's a good thing). What the book is big on is "execution-oriented" activities versus "output-oriented" activities. Execution-oriented activities are those that add value to the business. Everything you do should add value. Output-oriented activities are kind of check off activities and will eat up cash yet not get you any closer to the end-goal of the company. Often when a company gets to much money they focus on output-oriented activities like office space, furniture, infrastructure, events, etc. If your funding is tied to activities that increase value such as market validation, securing customers, hiring key personnel you will be more focused and protect your precious resources such as your cash.
Key points with Value Inflection Points:
- Execution milestones reduce risk
- They increase company valuation
- You should carefully plan them in advance
- Hit all of them before you raise more cash
- Raise enough to accomplish the next set of value inflection points
If you are concerned about the amount of your company that you are selling each time you raise money you need to focus on these concepts. By executing around value inflection points you will increase your company's valuation and create a better situation for you when you raise capital.