Explain the importance of the use-of-proceeds

The use-of-proceeds demonstrates how a company ecosystem moves to scale. The “use-of-proceeds” (from fundraising) tab in the operating plan is used to illustrate how much money is spent on the loop of engineering, marketing, sales, and finance & administration after the funds have been raised.

It is recommended you have the use-of-proceeds so you can demonstrate what your inflection point of sales is going to be during the initial stages of the company. The use-of-proceeds leads to a better understanding of the projected conversion rate, the most critical parameter in assessing whether an entrepreneur has realistic expectations of future outcomes and a game-plan to support it.

The conversion rate is the percentage of trial prospects in the total addressable market who become your customer in a given period.

From an investor perspective, I use the use-of-proceeds fervently because I want the majority of the proceeds to go to the relatively fixed cost of engineering that eats away at the variable cost of marketing and selling (the endless pit), and thus reduce the cost-of-sale. A better product is supposed to deliver better conversion, which in an ideal scenario may not require much marketing and selling because the value of the product sells itself.

To give you an example from experience, I once killed all marketing at a software product company I became the CEO of because I found out the conversion was only about 11%. Meaning, marketing a product generating 89% dropout customers causes more customer cannibalization and bad blood than good. The product was just not ready. In that case, I doubled-down the investment in engineering to create a product that yielded a much higher conversion, over the 50% mark and added marketing after we had sufficient proof that the product was good enough.

It is for that reason I have (from the beginning) been such a vehement opponent of the populist capital-efficiency models the many subprime VCs started preaching ten years ago. I was proven right again ;-)

You want to put money in a company to pursue risk, not to shun it. But you want to put it in where the impact of that money yields the best and quickest inflections. And a discussion about use-of-proceeds gives you a great instrument to see if the entrepreneur knows his business.

BTW: product in the macro sense of the word, it applies to an (online) service too.

Let’s lead the world by example with new rigors of excellence we first and successfully apply to ourselves.

Click to access the login or register cheese