Keeping Milestone Optionality: Startups, Your Nimbleness Is Your Strength

Identifying milestones for your company’s development is beneficial for an early stage startup for many reasons: the first is that planning milestones allow you to focus what you will be working on, secondly the process of identifying and planning them make you question when and in what order you and your team should try and execute something, and lastly, from a fundraising perspective (something I cover in more detail in my blog post on milestones) milestones are useful to tie together what you need to accomplish with how much money it will take to get there, and fundraise accordingly.

(Photo: Wikimedia)
(Photo: Wikimedia)

Identifying milestones for your company’s development is beneficial for an early stage startup for many reasons: the first is that planning milestones allow you to focus what you will be working on, secondly the process of identifying and planning them make you question when and in what order you and your team should try and execute something, and lastly, from a fundraising perspective (something I cover in more detail in my blog post on milestones) milestones are useful to tie together what you need to accomplish with how much money it will take to get there, and fundraise accordingly.

On this post, however, I’d like to address a very important concept that should be considered during this process of outlining and planning milestones. I call it, “keeping milestone optionality”.

You are not a large corporate

The principle is very simple… even though you plan your company’s future growth and associated cash needs, you can’t lose sight of the fact that you’re a nimble startup, not a large corporate that has to report to analysts and public market shareholders. Your nimbleness is your strength. A startup’s growth plan isn’t linear, it’s more like a series of zig zags. As such, whilst it is useful to forecast your milestones so that you have a plan, and understand your cash needs, it is also useful to look at that plan with one eye, while the other eye looks out for actions which might be more beneficial to your company than what you had originally envisaged or agreed with existing shareholders.

On my post on 7 reasons for founders to avoid tranched investments  I spoke about how a future tranche (a glorified milestone, if you will) could have a negative impact by dictating what a company should do, even if midway through its execution it turns out that it was a bad idea for the company to have that goal. For example, imagine if your plan had in place a monetization strategy (and associated revenue stream) kicking off in month 6 of your operations. Month 6 comes along and well, uptake is poor and your revenues are not coming in as expected. You have some chats with your customers and you find out that actually, the value they are getting from your product is mostly around the emerging network effect of your product, and because the network is still small, your early monetization is stifling the value they are getting because the barrier for new users to sign up is still high, and thus those that would be likely to pay are reluctant to pay.

Well, if you (or your investors) held you strictly to your original plan for the sake of ‘keeping to the plan’, you’d kill your company quite quickly, but by staying nimble and adapting your milestones to what you think should be the new direction, you might actually be better off than you would have been before. Naturally, this optionality comes at a cost, as your original plan will have changed and thus your cash burn will change and your goals (KPIs) will change as well… and that’s ok as long as you are aware how.

Good investor will back you up

Good early stage investors (particularly those that invest in pre product-market fit companies) know that this kind of change mid-way through their funding is a possibility and they should be backing you in your ability to make these difficult calls even if it means a deviation from the plan they invested in. However, you should be mindful that there are many investors out there, that for some reason, still believe highly in the adherence to a stated plan. If you can, avoid taking money from them. At the very early stages in a company’s development, particularly during the pre product-market fit phase, investors should invest in you for your ability to adapt to changing and evolving circumstances, and not in your ability to predict the future 18 months in advance and stick to the plan when it clearly isn’t working.

Of course, this isn’t a recommendation to throw out all forms of planning, it still helps to create a milestone plan based around your hypothesis of growth (and relevant KPIs), cash needs, for you can’t be changing strategies every month and you need to keep an eye on cash burn. At the same time, however, you should constantly monitor whether there is another milestone optionality play coming up. If you do find, however, that you are constantly questioning your original hypothesis for growth, perhaps there is a bigger problem you are facing, but by keeping an eye open for milestone optionality events, you might fare better than if you exert uber discipline to a rigid plan that was built before you learned many new things.

In conclusion, as a founder, plan for the future, identify key milestones to grow towards, but always keep milestone optionality, particularly in pre product-market fit companies.

Comments

  1. Francisco G. Guillen

    Francisco G. Guillen

    20. 3. 2014. in 11:57 am Reply

    Awesome post, Carlos!

    It’s actually pretty common because there are startups that design a very detailed traditional business plan (typical “MBA style”) often advised by non-Lean mentors. But it is already widely well-known in the startup community that this is not the best way to drive a startup.

    On the other hand, despite applying the Lean Startup principles, it is a common problem that many startups only focus on developing these techniques at its early stages, in the customer discovering phase. Like Eric Ries says, Lean Startup is for the whole life of the companies, then you cannot avoid applying it when you have some initial validation for your beginning hypothesis to plan like a very large company does. There are many reasons that it can radically change your milestone plan: the speed of change of the environment, the appearance of new competition, the discovery that your customer acquisition strategy doesn’t scale or a new growth hacking that works for you that can make important changes to your growth engine.

    So, the point is: what makes entrepreneurs try to develop a milestone plan? I think that the main point that encourages an entrepreneur to make a milestone plan is trying to reduce the feeling of uncertainty. And the only way to mitigate this kind of fear is to continue to do innovation accounting, during all the life of the startup.

    By the way, I saw your post about trenched investments several months ago in VentureBeat and it really helped me to avoid this strategy for the in-house investors of my accelerator program. Thank you very much, Carlos.

    Francisco G. Guillen
    http://www.impulsame.es

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