Follow Heather Twitter Facebook
Email Heather Email
Education
May 15, 2018

Time, Talent, Then Treasure: How Milestone-based Fundraising Puts Entrepreneurs First

Sponsored Content provided by Heather McWhorter - Director, UNCW Center for Innovation and Entrepreneurship

This Insights article was contributed by Brendan Collins, Seahawk Innovation Partner and CEO of mimijumi

Friends and family. Angel investors. Incubators. Series A. Convertible preferred stock. Liquidation preference.

The world of startup financing is filled with buzzwords and murky concepts that can be overwhelming and confusing for entrepreneurs. The mainstream business media, with its focus on fundraising, doesn’t help, and entrepreneurs could be forgiven for thinking entrepreneurship is all about raising capital and that successful fundraising equates to a pure victory.

But the reality is not so simple.

Successful traded sector startups need the three Ts of “time, talent and treasure.” In our experience at Seahawk Innovation, “treasure” is the least important of the three Ts. We advise entrepreneurs to follow a milestone-based fundraising model in which they raise only the capital required to achieve the next major milestone.

Entrepreneurs should invest their time and talents to identify a well-considered value proposition and develop a robust business model before thinking about raising money. The longer entrepreneurs can wait—and the more milestones they can achieve—before raising money, the better off they will be.

There are a few reasons why:

  • More milestones achieved = less investor risk = higher valuation. Investors are rightly obsessed with risk and its mitigation. Each achieved milestone (for example, a working prototype or the first paying customer) increases a company’s likelihood of success and lowers the perceived risk for investors. Investors are willing to pay higher prices for investments with lower risk. This means entrepreneurs can raise money at a higher valuation – and retain more of the company equity – if they raise money only after they have achieved major milestones.
  • Using time and talent first almost always lowers the amount of treasure required. Starting a company has been likened to scaling Mount Everest. To help guide climbers up the mountain and avoid costly mistakes, Everest expeditions always employ Sherpas with local knowledge. Similarly, by seeking the assistance of experienced partners, entrepreneurs can avoid mistakes like automating before finding product-market fit or hiring the right person at the wrong time. Avoiding errors and following a more direct path will significantly lower the amount of capital required and allow entrepreneurs to retain more of the upside for themselves.
  • Less capital required = improved definition of success and increased likelihood of exit. For a traded sector startup in which  exit value drives investor returns, the math is easy – the more money an entrepreneur raises, the higher the exit value required to generate an acceptable return for investors. Turning $500,000 of investment into a $5 million exit will generate an outstanding return for the investor and life-changing wealth for the entrepreneur. Furthermore, the universe of companies that can afford to make a $5 million acquisition is relatively broad.
Alternatively, when a company raises $5 million, the entrepreneur would need a minimum of a $5 million exit just to return the investors’ capital! Not only must the entrepreneur now target a $20-25 million exit to satisfy investors, but the universe of companies that can afford to make a $20-25 million acquisition is much smaller.

Further complicating the picture, the entrepreneur most likely sold a significant stake in the company to raise $5 million and as a result may not share much of the exit proceeds. 

By following a milestone-based fundraising model, entrepreneurs can lower the amount of capital they need, retain control of their company, maintain their definition of success, and increase their likelihood of successful exit.

Seahawk Innovation launches, funds and grows innovative, traded-sector businesses solving large, intractable problems like concussion (SportGait), personal safety (Safur), and breastfeeding while returning to work (mimijumi).

Diane Durance, MPA, is director of UNC Wilmington's Center for Innovation and Entrepreneurship (CIE). The CIE is a resource for the start-up and early-stage business community to help diversify the local economy with innovative solutions. For more information, visit www.uncw.edu/cie.

Other Posts from Heather McWhorter

Uncw cie 22
Ico insights

INSIGHTS

SPONSORS' CONTENT
Tommytaylor ceo unitedway

How Philanthropy Fits Into Your Financial Plan

Tommy Taylor - United Way
Mcwhorter 0005

The Coastal Corridor is Helping Wilmington Startups With Connected Devices for Life Sciences Industry

Heather McWhorter - UNCW Center for Innovation and Entrepreneurship
Pfinder john zachary

What You Need to Know About SECURE 2.0 and Its Effect on Individual Retirement Accounts

John B Zachary - Pathfinder Wealth Consulting

Trending News

New Hotel Proposed Along Market Street In Ogden

Emma Dill - Mar 15, 2024

Businesses Reopen A Week After Grace Street Facade Collapse

Emma Dill - Mar 15, 2024

Tech Upskilling Cohort To Host First Wilmington Class

Audrey Elsberry - Mar 15, 2024

In The Current Issue

Berries, A Battlefield And More In Pender

The N.C. Blueberry Festival, founded in 2003, is one of several events in Pender County that have drawn more attention over the years....


Topsail-area Realtors Share Updates

Pender County Realtors recently shared updates about the coastal market at an event hosted by the Wilmington-Cape Fear Home Builders Associa...


Park Progress

The planning for Pender Commerce Park began in the early 2000s when the county wanted to create an economic driver on its largely rural west...

Book On Business

The 2024 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

2023 Power Breakfast: Major Developments