The Duke Entrepreneurship Manual

Constructing Milestones

This section outlines in simple terms the process of constructing milestones for a new ventures. These milestones serve as the structure for the company’s financing plan (as well as the outline for the operating plan). The steps outlined are over simplified so that the structure of the process will be apparent. There are many subtleties and nuances in the application of these steps in any venture.

STEP 1

Begin by creating a list of the ways in which the venture might fail. New ventures are inherently risky in the sense that there is a significant probability of failure, despite the supreme confidence of many entrepreneurs. Failure can occur for many reasons. The reasons may relate to the performance of the company, the response of the market, industry factors, etc.

STEP 2

The risk in a new venture is the probability of one of these adverse events occurring. However, not all of these events would have the same impact on the venture. Some may be life-threatening while some may just imply a less rosy outcome (lower ultimate market share, higher expense required to achieve some level of market acceptance, etc.) In addition, the adverse events are not equally probable. Finally, resolving the issue may take considerably different amounts of time and money.

Bearing this in mind, step 2 is to order the list by immediacy, where the factors are:

  • how probable the outcome is,
  • how high the negative impact of that outcome would be (damaging, life-threatening, etc.)
  • how expensive it would be to resolve the uncertainty (including possibly the dependence of this item on some other item as for example where the uncertainty regarding consumer acceptance might depend on the existence of a prototype).
We can think of this list as ordering based on 
 

Probability times Impact divided by Cost

This ordering is the first step on the path to creating a timeline or roadmap for the venture.

The basic idea is that the items higher on the list are the ones that resolve the greatest uncertainty for the least amount of money and time.

STEP 3

So far we have considered the adverse events as though they were independent and could be handled sequentially. In general this is not true. And even when items could be dealt with sequentially, doing so would imply an unacceptable pace of development of the venture.

(Brief digression on pace: Entrepreneurial folklore implies that it is always vital to go as fast as possible. This is generally not true. There is often a trade-off between speed and cost, that is, it is often more expensive to do things fast than slower. This may be because parallel development on multiple fronts brings additional costs, or increases the probability of having to re-do things as more is learned, or simply because the money needed to achieve A and B together is more expensive than the money to achieve B if A has already been achieved. So part of the entrepreneurial decision making process is weighing the need to get to market and establish position quickly against the need to be efficient with capital and other resources.)

The third step in our process is to introduce parallelism and concurrency into the ordered list created in step 2. This parallelism involves a few considerations:

  • Balancing the need to get to market quickly with the need to be efficient with capital and resources,
  • Recognizing dependencies between items,
  • In some cases, considering perceptions of investors and other constituencies.

The revised list is the company timeline.

STEP 4

The new timeline allows for events/items/achievements to be grouped. The entrepreneur can identify milestones as the major events on the company timeline. The milestones are the major events that resolve uncertainty around the success of the venture. Achieving these milestones should cause the valuation of your venture to increase substantially.

STEP 5

The next step ties the timeline to financing. At this point you have to estimate the time and money required to accomplish each milestone. (Note that you need to do this in a preliminary way in order to create the ordering in step 2.)

(The estimation of time and money requires that you actually create a plan for achieving each of the items on the list. This process actually results in an operating plan for the company.)

A logical financing plan always includes a reasonable buffer (in the range of 20%) to allow for unknowns. When you include a buffer, you are potentially raising money at lower valuation than you need to. You can think of this as the cost of insurance. On the other hand, investors may not be willing to give you as much as you are requesting.

No matter how well constructed your financing plan, market conditions, investor perceptions, or other factors may cause the actual funding of your venture to be quite different from your plan.

STEP 6

Revise the plan as you learn. Do not allow your plan to become a straightjacket.