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.

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  • personal development guru

    Thank You! Great post, very informative! I'll keep it in mind next time I have to make a pitch to my investors.

  • flowerspage

    Thanks for very interesting information !

  • brad

    very nice and interesting .good luck.

  • ronnichols

    Interesting approach, thanks for sharing!

    The only way to explain investors on a clear scheme what your plans are is to have a well shaped and simple business plan. Set clear milestones you can argument and the following steps you're going to take in order to achieve them. Manage alternative ways too. Not everything may happen as you planned it.

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  • salomgea

    great article, and vey usefull

  • greg

    No money no buisness :)
    Good ^

  • greg

    No money no buisness :)

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  • cindybryant

    About 4 years ago I worked for a start-up that had closed a few rounds of VC money. One of the events we put on in Vegas they had spent nearly $40K on one night. This included girls to be “social” for the evening. I was also told that it was typical for start-ups to use some of their funds in a similar manner. *sad*

  • condos queen mary park

    ahahaha big cats throwing their funds on social parties. I would love to be working for those companies short term, but in the long run they don't sound responsible. Work hard now, party hard later.

  • Chrisarsenault

    Validation, validation, validation, every penny you raise must allow you to do some validation of your model, your product, your market, your potential. As an entrepreneur you have the right to spend your money and time as you see fit. Once you raise cash from someone else, then there is a whole new layer of responsibility, collaboration expectation management that kicks in. Have to be ready and willing for it or else don't raise external cash.

  • Benjamin Yoskovitz

    I completely agree. I think the emphasis on validation – and understanding / agreeing on the goals of validation each step of the way is critical for entrepreneurs and investors. The definition of “validation” could be wildly different between entrepreneur and investor, which will lead to trouble down the road.

  • cognitive46

    I am truly agree with post and actual emphases is on validation

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