The Magic of Milestone-Based Funding

There’s a law in Silicon Valley as basic as F = ma: milestone-based funding. It’s why you can’t raise $100 million on day 1. It’s also why my positions in my strongest companies are many times larger than my weakest ones, as if by magic.


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…You show incremental progress. We’re engaged in milestone-based investing where the amount of money you raise and the valuation you’re able to get scales with the amount of proof you have delivered to investors about the company.”

David Sacks, All In Podcast #43

Milestone-based funding means that you don’t get all the money your company will ever need at once. Instead, you get a little now, go accomplish some stuff, and come back for more.

In venture’s early days, a company was financed once, and it either sunk or swam. Milestone based funding lets investors allocate their capital more efficiently.

The most successful companies need more money to grow. Meanwhile, throwing good money after bad rarely gets you anywhere.

Let’s see how this works in practice by looking at two companies in my portfolio.

A Tale of Two Startups

I invested in both Company A and Company B within weeks of each other in the spring of 2021. With high hopes, I sent in my wires and envisioned a wonderful future for both.

Well, I was half right.

Company B has increased revenue 6-fold since then. It’s expanding to new markets and signing up customers like crazy.

For Company A, the picture isn’t nearly as rosy.

Revenue hasn’t grown at all and burn is heavy. Raising more money is impossible and bankruptcy is a very real possibility.

How Milestone-Based Funding Played Out

My initial investment in both these companies was exactly the same amount. But now, my investment in Company B is almost 6 times as large.

The reason is very simple: I doubled down in Company B and did not reinvest in Company A.

Company B recently raised a much larger round at the same price as before. With amazing progress, I was happy to 6x my investment.

Add in a little dilution from this round, and my position in Company B is nearly 6 times bigger than my position in A.

If Company B continues to perform well, I’ll be putting in even more. That, plus increases in valuation, may eventually make my investment in B dozens or hundreds of times larger.

What This Means for Founders

Raise an amount appropriate to where your company is at today.

If you have only a couple of customers, you’re probably looking at around $500,000 in pre-seed. If you have $250,000 ARR, you may be able to raise a $2 million seed round.

Then, keep those investors updated on your progress. Remember, there’s more money where that came from!

Milestone-based funding is a brutal system, but it’s necessary.

I’d love to help Company A with another check. I love what they do and I want to see them succeed.

But I just can’t justify it when other startups are performing better.

What questions do you have about fundraising? Leave a comment at the bottom and let me know!

More on tech:

Is SBF Laundering Money As We Speak?

Zero to One

Why I Just Invested in Rilla, the Killer App for Outside Sales

Note: Shout-out to Fathom.fm for finding that David Sacks quote in seconds. Making audio searchable really is the future! Delighted to be an investor in this great startup.

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Photo: “David Sacks” by jdlasica is licensed under CC BY 2.0.

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