Most startups founders are faced with milestone provisions by their investors. The investors do it because they think it helps them steer the startup in the right direction. And because they think it gives guidance for deciding on further funding. The headline reveals it is a mistake. This article will explain why milestones kill startups and suggest how to actually measure progress.
When Octavian was 19 years old, his ruthless uncle was brutally assassinated by a group of political opponents. The young man resolved to achieve what his uncle had not. Founding the world’s largest and longest-lasting empire.
And so, Octavian began materializing his vision. He called it Pax Romana. We know it as the Roman Empire.
To people of his time, Octavian wasn’t a celebrity. He did not display the same early sweeping conquests as his assassinated uncle, Julius Caesar. Nor the bravado and charisma.
Instead, Octavian was a founder. His ambition went beyond military success, fame, and power. He wanted to create something lasting.
Gauging the career of Octavian, one notices the wide range of things he accomplished. Surely, he enlarged the empire through military campaigns. But more importantly, he created structural development. Like tax reforms. Setting up a firefighting brigade, and a professional police force. And obviously erected many buildings, temples, and monuments.
The result was peace. The reward was a natural death at an old age. Something rarely bestowed rulers of his time. And as you will see, the story of Octavian holds an important lesson for startup founders and their investors.
Lasting companies and lasting empires are similar
Small projects can be planned, managed and tracked. In contrast, Large projects, like building an empire cannot. The complexity, timescale, and unknowns will not allow it.
Instead, large projects require a founder (or founder team) with a deep resolve to materialize a vision that is larger than himself/herself. Just like Octavian. But more importantly, the founder must focus on a wide range of issues. Also, just like Octavian.
The large range of elements that goes into building a lasting empire requires something quite different from a plan. It requires awareness and courage. Awareness of coming issues and the courage to do something about them. It was true for founders of lasting empires. It is equally true for founders of lasting companies.
The elements that go into building something lasting are entangled and interdependent. In other words, a lot of things depends on other things. Revenue requires sales channels, that requires partnerships, that requires multilevel value propositions, that requires customer insights, that requires nurtured relationships and so on. When one thing changes, most other things changes. Octavian knew this. So do most startup founders. But for some reason, many investors seem to have missed this.
Milestones are flawed and destructive if not done right
Many investors place ‘milestones’ in their investment agreements. And these milestones tend to be flawed, if not downright destructive. The problem is that the milestones often have little connection to the actual job of building the company.
Instead, the milestones seem to reflect the faulty idea that the progress of large projects can be measured on a single dimension. Like the number of users. Downloads or revenue. But that would be like evaluating the progress of an empire by area or population. The first could easily be achieved by annexing uninhabited desert. The second by paying people to become citizens. Octavian did none of those things. Why? First of all, he wasn’t stupid. Secondly, he didn’t have investors who were.
Octavian focused on whatever made sense. He shifted his focus to what was needed to advance his project to the next stage and ensure its long term viability. So do the best startup founders. At one point they recruit. Then they release the next version. Then they build partnerships. Then they fundraise.
Founders successively focus on specific dimensions of their company. And when they do, the company progresses. But not in a linear function. It happens in steps. That means each dimension is stagnant for a period until the founders find it relevant to focus on it.
When investors make founders focus on a single dimension by enforcing simplistic milestones, they do one of two things. Either the investor presumes that he/she knows better than the founders what dimension needs focus. Or the investor is ignorant of the mechanics of large complex projects. Both should be colossal red flags to a founder considering an investor.
In cases where milestones are put in practice, the result is that the founders start doing stupid things. Why? Because humans follow the reward. And the easiest way to hit the milestone and claim the reward is rarely to do the right thing. Those who experienced the Great Leap Forward in China between 1958 to 1962 would agree.
That said, milestones make sense. Both for the founder and the investor. Understanding if a project progresses is important to avoid what economists call the sunk cost fallacy. In other words, keep doing something you should stop doing.
However, milestones only make sense if they actually capture the progress that is natural to the development of the company. What is natural, changes almost daily. And only the founders have the information to make this judgment.
Still, it is possible to define the potential areas of progress. An early-stage startup can grow in four dimensions. Those are: human capital, technology capital, customer capital, cash capital. E.g. if a startup recruits a rock star, it is progress. If a technology breakthrough happens, it is progress. If customer loyalty increases, it is progress. If the free cash flow increases, it is progress.
Consequently, the only sensible way to craft milestones for early stage startups is to include any and all type of relevant progress, and simply trust that the founders know where to allocate their attention. If investors do not trust founders on this, it is not the milestone that is wrong.