Planning for a Fundraise Pt. 2
Framing your Use of Proceeds
Investing on Behalf
As a refresher, use of proceeds refers to how you plan to spend your investors’ capital, and a somewhat thorough estimate of this plan is required prior to fundraising at all stages, from Seed through IPO. While it may appear on the surface level that use of proceeds is a question over a tactical budget, it actually speaks more so to your company’s investment strategy.
In a deconstructed sense, when a VC provides you with financing, in many ways they are shifting the onus of “what to invest in” onto you. Sure, they have to do the due diligence on your industry and vet that you and your company have what it takes to execute. But funding rounds are just pieces. What you build (product, team, moat, etc.) with them is what creates value.
Whether you purchase high-end office furniture or a new piece of machinery, hire more engineers or buy ads, all of these things should be viewed as investments you are making on behalf of your investors towards building your company’s value; and, therefore thoroughly contemplated and rationalized.
Hence value building is the key component to how you answer the questions “why are we fundraising?”
The tactical reasoning could likely be you are running out of money or need extra capital to make a concerted push into a new market. However, consider framing the rationale around the concept of return — you invest because you have the expectation of some sort of accretive outcome.
In this sense, use of proceeds should be explicit components of your company’s investment strategy that can be directly tied to value unlocking outcomes. Uplifts in stakeholder value can be measured in all types of ways (profitability, revenue growth, social impact, productivity etc.). But in terms of brass tacks, you (and your employees and investors) want your company’s valuation to go up, and be a step closer to liquidity :)
And your use of proceeds strategy should reflect the immediacy of the moment — investment is largely about timing. This shifts the fundraising question you need to ask yourself to: “why are we investing our stakeholders now into X?” What does the Zeitgeist of your industry tell you about your place in it?
Incorporating the logic above, your answer to the baseline question of why you are fundraising should be: “We’re fundraising because it unlocks value by [insert your rationale], and our use of proceeds represents our investment strategy to create this now.”
RE: Relativity Space Series B
During our Series B planning at Relativity, we initially approached use of proceeds purely in terms of summing up all the production equipment we needed to get to a single launch of our rocket. This was largely my thinking.
As a team of 14, we farmed out budgeting sheets to our engineering leads, and began the process of counting up everyone’s shopping carts. We framed our use of proceeds as a resource requirement to buy equipment and so forth. It was very much, “what we intend to buy to get to a first flight if you invest in us.” I know, not inspiring.
Predictably, the use of proceeds narrative of buying a bunch of stuff to get to launch wasn’t landing with investors. We had to remind ourselves that we were competing not with only other rocket companies, but with all other opportunity costs that blue chip investors could face — say any generic Unicorn SAAS company.
While it is a historic achievement, you don’t get a trophy and a billion dollars for a single successful test launch. Prospective investors wanted to understand how we were going to build value on par with other venture investments.
To answer this, we reflected on NASA’s Apollo program, the literal moonshot. Most of the long-term economic value was created by the innovation discovered along the way. Our company’s lasting value, as we came to realize, was not just in being the first company to try and launch a 3D printed rocket, but in how our additive manufacturing approach could potentially change the launch industry and other industries in the long run.
Equipping this perspective, we realized that beyond the hard requirements of “stuff” needed to get to the next step, what was really important to communicate was our vision in changing how many things were made. Of course, our major near-term milestone is to get to launch, but our goals actually lay far beyond that.
While we had been singularly focused with fundraising on getting to our next milestone, what we actually wanted to do was create a platform to “3D print humanity’s future in space”, with rockets being just the first application. In order to do this, we needed to invest in our 3D printing technology and bring in more of the right people to innovate long-term technological value on our path to launch.
We concluded that fundraising would drive value for Relativity by unlocking access to world-class talent who not only have built rockets start to finish, but also could accelerate our rate of 3D printing innovation. Thus, we centered our use of proceeds pitch around investing in growing our team intelligently to continue innovating on 3D printing technology, which would bolster our capabilities as a launch company.
The timing of our mission also factored into our attractiveness as a company. Not only is 3D printing making great strides in terms of quality and application, but also awareness — the world is looking for new areas of disruption post-internet and digital experience. Our messaging on timing centered on the premise that even if we weren’t the ones who would be able to achieve it, we couldn’t imagine a world in which 3D printed rockets weren’t flying daily in 10 years.
We figured though that having the best people in place could both unlock our near-term milestone of launch and our long-term mission of enabling humanity’s future in space. Alongside our technical achievements, this use of proceeds investment strategy on talent driven innovation coupled with a big vision resonated with prospective investors and helped us close our Series B round.
One may say that we had the mission and value argument easy since we are in the realm of space technology. It is a hot sector. But I’d disagree since the upfront fixed costs tend to give most investors palpitations and steer them away. Who is to blame? Many things are yet to be proven, and the financial risks are high.
But our differentiator was not only in trying to be the first, but also a drive to be something more than just another orbital launch company. Rather we wanted to be an innovator on how things are made, both terrestrially and in space. In reconciling our goal of being the first to launch a 3D printed rocket with our goal of also shepherding in a new wave of manufacturing technology, we convinced investors that our fantastical vision could lead to value creation.
Naturally, after landing on what to invest in with your use of proceeds, determining the scope of what you want to achieve by when will largely size how much you want to raise. However, the size of the financing round will be heavily dependent on your financing stage. I’ll cover that in my next post.
