Use of Funds

Almost every investor pitch, whether to angel investors or venture capitalists involves one slide near the end about how much money a startup is looking to raise, milestones it hopes to achieve and generally, the “use of funds.”

The intent behind describing the use of funds is to explain to the potential investors how you plan on spending their money. Pretty straightforward, right?

The only problem is that most descriptions of “use of funds” are incredibly generic and standard, typically involving the following:

  • hire key personnel
  • product development
  • sales & marketing

Hhhm…the phrase, “No shit Sherlock…” comes to mind.

The discussion over use of funds between entrepreneur and investor needs to be much more open and detailed, because it’s absolutely essential to understand how much money you’ll need as a startup to get to the next critical milestone to justify the next major step.

That next major step might be an exit or raising additional financing. Or it might be neither, but if you think of each major step as a gate, then the money you raise at each step is there to help you determine whether or not you can successfully walk through the gate or break your nose on it.

Startups should have an idea on what critical milestones need to be achieved to justify the next big step.
Maybe it’s a certain number of paying customers, or a certain number of free users. It could be traffic, or some other key metric (or a few metrics / targets) of importance. For example, it could be having 20 big brand clients, or securing some critical distribution and partnership deals. Whatever the metrics or milestones, if they can’t be spelled out very clearly then it becomes much harder to judge whether a startup is ready for the next big step. And that confuses the matter when that next big step is raising financing. What amount should be raised? What valuation? With who?

Mark MacLeod wrote a blog post about Angels vs. VCs. Go read it. And check out the comments too. Chris Arsenault at iNovia Capital makes some great points in there. He also mentioned (on Twitter) that 14 of iNovia’s 17 last investments included angels. That’s quite the mix.

Although there are definitely differences between angel investors and venture capitalists, if your “use of funds” plan is rock solid, and openly discussed during the investment process, the distinction is less important. What is absolutely crucial is how much money you need to raise to get you to the next big step.

Want more content like this?

Signup for free and you'll get new content as soon as it's available. Thanks!