Imagine, if you will, a contractor who approaches you with a gleam in his eye and a plan so vague it might as well be written in invisible ink. “Believe me,” they say, “I will work on your house for three months. I will spend 30% of the money on plumbing, 30% on framing and wall and roof construction, 10% on electrical work and the rest on painting and so on.” When you ask them if the house will be habitable in the end, they shrug. “Who knows? But isn't the journey exciting?”
This is a scenario so absurd it would make the contractor laugh from his yet-to-be-installed front door. But this example is eerily similar to the pitch many startup founders make to potential investors. My research indicates that more than half of founders don't have a decent “use of funds” slide. This is not cool. Founders, you can do better.
When you are building a house, of course you demand a plan, a schedule and a clear image of what your future home will be like. You wouldn't settle for a contractor whose only plans are to “wing it.” However, in the startup space, founders often hope that investors will buy into a dream woven with threads of ambiguity.
Investors, like homeowners, are not looking to invest their money in a foundation that leads nowhere. They want to invest in a “house” that, at the end of the construction period, will not only be standing but also ready for the next phase, whether living in or selling.
For a startup, the “finished house” is not bricks, mortar and those cool USB plugs, but is built with milestones and achievements.
Will the startup have filed any patents? How many customers will it attract? What income figures will you boast? These are the “rooms” and “fixtures” that investors look to find in the startup. If these milestones align with what investors expect for the startup's next funding round, the startup has a pretty decent chance of achieving a successful fundraising.
The house analogy works in more ways than one: mistakes happen, and completely wrong estimates are quite common. No one expects a contractor to predict the future with absolute certainty; Weather delays, supply issues, and other unforeseen events can always complicate things. However, a good contractor will have a plan, schedule, and contingency measures.
When it comes to startups, reviewing plans and finding holes in them is called “doing due diligence.” Startup founders cannot foresee every market fluctuation or challenge, but they can and should outline their goals, strategies, and how they plan to overcome potential obstacles. This plan is your blueprint for success, and the plan should be at least in the realm of feasible.
Look, I understand. Founders may avoid providing detailed plans, perhaps for fear of failure or criticism. Maybe it's your first startup. Or maybe there are gaping holes of the unknown in your future. Okay, that's reasonable, but it shows that you also know how to plan for it.
The journey of building a startup is an adventure full of unexpected turns, much like building your dream home. Anyone who has taken their home to the studs has at some point sat in the middle of a trashed living room, sobbing as another curveball is thrown their way. This is the life of a startup: you roll with the punches.
But you need a plan and you need to be able to present that plan as part of your presentation. No one will give you a van, a blank check, or directions to the nearest Lowe's. You need to specify your “use of funds.”
