Early stage startup funding has two flavors of disbursement. All at once or in tranches. For the sake of this post, we’ll only talk about a tranched (milestone-based) funding approach. You achieve a pre-determined goal (milestone) and you get your funding. It’s a simple concept, but it often places startups in a tough position when funding is tight and milestones aren’t being met. With limited flexibility, this process can kill good companies that are doing good work.
Here are a couple of perspectives on why milestones are bad for startups:
Amit Karp of Bessemer Venture Partners – Why milestone-based agreements are bad for early stage startups
Paul Jones – What Entrepreneurs Need to Know About Milestone Financing
Why does UpTech use milestone-based funding if this approach is commonly viewed as bad for startups?
Here are the 3 main reasons why UpTech uses a milestone-based funding approach:
1. They work well for early stage startups in short programs
This approach helps our startups focus on what’s necessary to build a solid, value-creating, investable business. Our milestones are directly aligned with our investable criteria checklist. It’s all laid out so there is no wondering what matters. The milestone work items are exactly what investors are looking for in a startup.
2. Builds a strong understanding of milestone/goal setting and reporting skills in our founders
Believe it or not, one of the skills we work on the most with our founders is effective operation. You can call it project management, prioritization or whatever, but it comes down to operating effectively. Getting stuff done when you say you will. The milestones create early targets that are a part of what we expect founders to be working on. Our milestones don’t encompass everything on purpose. We want our founders to push their personal growth and become effective managers of their businesses, not only product/service creators.
The reporting side comes in the form of what we expect our founders to show that they have met the milestone criteria. We know that effective communication/reporting is one of the drivers of good investor relations so we focus on this during our program.
3. We invest in pre-seed startups
Even with the best due diligence sometimes things happen: personal founder issues, team conflicts, market changes, regulation changes, etc. These are the exception to the norm in our program, but it’s a reality that we recognize.
What is UpTech’s milestone-based funding process?
UpTech disburses $20,000 when a startup is selected and due diligence is completed. Three milestones are defined in writing at the beginning of the program. Each milestone is a combination of pre-defined and custom criteria tailored to each startup. Each milestone means another $10,000 disbursement for a total of $50,000 available to each startup.
Flexibility is the most important aspect we have built into our approach. We work with the founders every week to ensure their milestones are still relevant to becoming an investable startup. This accounts for the myriad of changes that can and will occur within startups.
What do you think about milestone-based funding? Leave us a comment or contact us as we’d love to hear from you.