The Stepping Stones should then seamlessly match the financing strategy for the business.Consider the example of Creditica in the above figure. If the team has established a workable set of stepping-stones and if the company executes the plan well, it will raise four rounds of investment in the course of its development. In the VC business these are called Series A, B, C and D and so forth.
Many software companies before Creditica have proven that moving from stepping-stone to stepping-stone, while continuing to convince investors of the size of the ultimate prize, is a good financing strategy for a company.
The Series A round should be big enough to get the company to stepping stone 1 (with some margin of error since plans generally take longer to execute than expected). In theory, from start-up, the company could consider raising enough money to take itself to stepping-stone 2 or beyond - if it can find a willing investor. But this misses the point. At start-up the company will probably be at the lowest valuation of its existence. Therefore, if it raised the capital to get it all the way to stepping-stone 2 or beyond, the initial shareholders would suffer far more dilution in their ownership percentages than is necessary. Better to raise just enough capital now and raise more later at a higher valuation.
This is the essence of the early-stage venture game - raising just enough to get to the next stage of development of the company (with a reasonable margin of error) in the hope and expectation of raising more capital on much more attractive terms later.
To get started, the entrepreneur needs to convince the investors of three propositions:
- The ultimate prize is worth going for. (The opportunity is big enough for early investors to get a 10 to 20 times multiple return on their investment.)
- There are logical, achievable stepping-stones between start-up and the prize. (There are future points in the development of the company where new investors can be enticed to come on board and where the risks of the business have been progressively stripped away.)
- The first stepping-stone on the way to the prize, by itself, is a stepping-stone worthy of investment by the investor. (A second-round investor will pay a price per share two to four times the price the early investor paid.)
