Make Your Investors Money Count
Updated: May 20, 2019
Money Raised Must Used to Create Value
Before investors commit funds to your company, they'll want to know how their hard-earned money will be used.
Companies seeking investors detail their plans in the USE OF PROCEEDS section in a fundraising or offering document. Early stage companies must be keenly focused on using any money raised to increase the valuation of the firm for the next round of funding.
The trick is to raise just enough money to accomplish a critical milestone or two. For instance, with a $5,000,000 investment the company may be able to "complete the prototype" or "launch product" or expand into a new market.
But, often companies are not focused on accomplishing objectives that will increase value. Recently, I reviewed an offering document for an early stage company and the USE OF PROCEEDS section said things like "buy new office furniture", "lease a new office", "pay down debt," etc.
None of these USE OF PROCEEDS will increase the value of the company. They will find themselves with a lower valuation ("down round") the next time they raise money, making it that much more difficult to sustain their business.
What does a successful USE OF PROCEEDS look like?
It's a goal that, when accomplished, will increase the valuation of your company. For example, your USE OF PROCEEDS may be "complete the new prototype and place in 10 alpha customers for feedback." Accomplishing that goal increases management credibility and benefits your company. Long term, it gives the investor a reason to give you a higher valuation the next time you are raising money.