Sample frameDay 280·Entrepreneurship · Capital

Good morning. Investors don't hand over money. They release it, in pieces, against things you've proved.

Entrepreneurship.

Staged Capital

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The question

Can you name the single fact about this business that isn't true today, will be true by the time this money is spent, and would make the next investor pay more for the same share — or was the first thing that came to mind 'about eighteen months of runway'? That's a duration, not a milestone, and a duration is the one thing no later investor pays extra for.

The idea

In 1990 the Journal of Financial Economics ran a paper close to fifty pages long that took venture capital apart mechanism by mechanism: The Structure and Governance of Venture-Capital Organizations, by William Sahlman of Harvard Business School. His verdict on which mechanism mattered was flat — the most important one for controlling the venture, he wrote, is staging the infusion of capital. Money arrives in instalments, and each company, in his phrase, begins life knowing it has only enough capital to reach the next stage. The logic is unsentimental. By staging capital, Sahlman noted, investors preserve the right to abandon a project whose prospects look dim, and that right is worth a great deal in a business where most of the outcomes are bad. You've met the principle from your own side twice already — commit in the smallest increment the opportunity accepts, size the step by what you can afford to lose. What changes here is who holds the option. Every tranche is a fresh decision, taken by somebody else, with more information than the last one and considerably less enthusiasm than the pitch. The trap is a round sized by how long you'd like to stop worrying about money. Runway is a duration, and nobody buying the next round pays extra for one.

The framework

01
Argue the trigger, not just the amount.
Where money is released in instalments, founders negotiate the size hard and the release condition barely at all, which is backwards: the condition is the part that gets missed. A trigger tied to your own delivery is a target you can work towards — a product shipped, a certification obtained, a stated revenue run rate. A trigger tied to a partner signing, a regulator moving or a market recovering hands somebody outside the building a veto over your funding. Argue every condition down to something objective, dated and inside your own operations, then settle in writing what happens when a tranche is missed by a month rather than by a mile.
02
A round buys one milestone, and the milestone sets the size.
Start with the fact, not the figure. What will be true about this business when the money is spent that isn't true now — a pilot converted to a paying contract, a second market opened, unit economics positive at volume? That fact is what a later investor is buying, so it's what sets the price of the next round. Cost the path to it honestly, price the months the raising itself will eat at your monthly spend, add the two together, and the size falls out of the arithmetic. Sizing by runway does the reverse: it names a duration first, then goes looking for something to do with it.
03
Running out halfway to a milestone is the most expensive place to stand.
You're asking for money having proved nothing new, and everybody in the room knows the alternative is nothing at all. That's how bridge rounds and punishing terms arrive, and it's usually a sizing error rather than a performance one. So cost the milestone, then add a real margin on top, because plans slip and every raise takes longer than the last one did. Put the slip inside the round rather than inside the hope. The buffer isn't padding; it's the difference between negotiating and pleading, and it costs less dilution today than it will cost you in terms nine months from now.
04
Spend it like the person who has to come back and ask again.
Staging doesn't end when the money lands; it ends when the next investor decides. Take the milestone you sold, break it into the quarterly evidence that proves it, and report against that evidence every month whether anyone asks or not — same figures, same order, in the update and in the board pack. Investors fund progress they can see, and more than that they fund founders whose previous forecasts turned out to be roughly true. That record is an asset in its own right when you come back, and it's the only part of the next raise you can start building today.

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