Milestone-based funding

We all know the traditional way of startup funding: secure a fat check from investors and give up some equity in return. I’m curious on a method—milestone-based funding.

I’ve tested this approach myself in the Adawell project within Web3 funding. By delivering Monthly Reports of Deliverables/Proof of Work, I received funds in phases. While it was a smaller-scale project, this approach perfectly aligned the interests of both founder and investor by ensuring capital was deployed as progress was systematically monitored. And I’m convinced that it will gain traction. Maybe, the next big thing for bootstrapped solo founders leading small teams.

Pros for founders

• know exactly where you are headed and how to get there

• every expenditure is justified and optimized

• as milestones are achieved, the startup's valuation may increase, allowing subsequent funding tranches to be secured at higher valuations

Pros for investors

• monitor the startup's progress, know if your capital is being used effectively, reduce the risk of premature cash depletion

• provide feedback, adjust strategies, and make decisions about continued financial support

• not required to commit the entire capital upfront; instead, funds are distributed over time

Challenges

• unreasonably tight milestones might push startups to make short-term decisions at the expense of long-term success

• critical challenge is the precise definition of milestones and acceptance criteria; ambiguous targets = misunderstandings and conflicts

• legal framework in terms of funding disbursements, what constitutes the achievement of a milestone, and potential remedies if milestones are not met

  

Example:

Let’s say a startup needs $100,000 to get to market. An investor loves the idea but prefers a milestone-based funding plan:

• First Tranche ($20,000): Upfront for research and initial development.

• Second Tranche ($30,000): Upon successful MVP creation.

• Third Tranche ($50,000): Released after gaining regulatory approval and moving into mass production.

In the future, I’ll be testing this approach with angel investors by laying out clear plans, milestones, goals, and acceptance criteria. I believe this method minimizes risk for both sides while promoting disciplined, strategic growth.

In future, I’m going to test it by approaching angel investors with a precise plan, milestones, goals, and acceptance criteria. Would you invest in ventures within this approach?

Would you invest in ventures following this milestone-based approach? 🤔

Oh, and I recently met Michael Narea, the Co-founder of Transcend Network who is exploring metric-driven approaches in web3 for his OCX grant. If this is a space you’re diving into, you should connect with him!

See you next time.

Ada