While I completely agree that fundraising itself isn't a milestone, it is often a signal of an internal milestone successfully met. And since startups rarely tell us what is really going on inside, people following along outside report this indicator so that other interested parties can follow along.
One of the unusual ways that playing the card game Bridge is like startup news is that bidding in bridge is saying something which is related to what you have in your hand but not explicitly what is in your hand. And bidding conventions allow the other players to also follow along and guess what you have. So it is with startups and funding. You get a seed round there is enough interest to give you some money, then there is a pause and then either you get a series A and everyone "knows" your basic idea has at least some legs, or you don't and people start to wonder if you're going to flame out. Then if you continue hiring without another funding round everyone gets really excited, but if you did raise the series A people put a pin in the board to check in again with you in a year to 18 months. At which point you're either growing without doing a round, or your out trying to raise a series B. Depending on who you talk to, some folks think series B is the point where you've got a product you have de-risked it to the point where you can get to 1.0. Others think it is the round where you start bringing your vision to market to convince the larger world you're for real. Series C was the "big one" back in the day, that one took you into production and made you a going concern, if you did a series D at that point it was to get ready for your IPO. Series after D were typically "bad" signs of encroaching zombieness or desperation. Not self sufficient, but not clearly established enough that the general public would believe you were going to make it.
So I agree that funding rounds aren't milestones, but they can certainly be interpreted as a count down.
True. You can fundamentally view the relationship between a startup's progress and its wont to fund as occurring against a constantly shifting risk/reward ratio for the VC.
If the startup can say "look, we have product A with feature set B", that's something. If they can say "look, we also have X customers and Y growth with Z profitability", that's something more.
It is perfectly reasonable for startups, seeing that the risk/reward graph shifts significantly at certain achievements, to schedule funding rounds in such a way as to minimize that risk for investors and thus retain maximum ownership.
For example, in our case (a hardware startup with four digit unit prices per product) we are naturally deferring Series A until we have achieved a final manufacturing-ready prototype, both because we need serious cash to make production happen at decent volume, and because anything earlier would be suicidal from the perspective of long term value due to far higher VC-perceived risk.
Honestly - looking at how many VC funds actually make good returns - I would say often isn't accurate. Remember that raising a series A is associated with many more failed companies than successful. I think there are far better signals for the core fundamental skills of a business.
"you get a series A and everyone "knows" your basic idea has at least some legs"
but then you say
"some folks think series B is the point where you've got a product you have de-risked it to the point where you can get to 1.0"
I've been in the valley raising money this last year and what I saw no venture firm will look at you for a Series A before you are on V 2.0 with outsized traction and breakneck growth.
Where are these companies getting Series A money (3 MM+) without a V1.0?
"the round was raised because the founders were charismatic serial entrepreneurs who knew how to play the fundraising game."
From what I've seen folks are often handed huge checks based on past success and strength of the vision; you don't necessarily need a v1.0 (or even v0.1 product). Consider this example:
First, disclaimer, all generalizations about VCs are wrong, including this one. :-)
I've gone through the process three times (twice as founder, once as executive level employee, web product, HW product, web product) and the commonality of those three times was risk evaluation. There is a ton of stuff written about startups but I think of there being four major phases, Idea Risk, Execution Risk, Market Risk, Capitalization Risk.
Idea Risk is just that, the idea sounds stupid and we're sure nobody wants it. So maybe you get someone who has enough free cash that they throw some money your way as a seed round/party round. There are probably all sorts of questions about the idea and whether or not people will buy it and whether or not it is 'sticky' enough to become part of somebody's daily routine. All basically around is the idea something worth checking out. People get past that in a variety of ways, sometimes it is iterating several times on different visions until they are getting sales for real money or commitments by larger partners in the form of Purchase Orders. Time to move to the next step, execution risk.
Execution risk is that you won't be able to build a team to put all the moving parts together to create a functioning business around your idea. At this point you need to hire some people and actually pay them salaries, and have a health care plan and an actual office (perhaps) to meet with people. That is series A time. Sometimes the investment is modest and this looks like a 'big seed round' sometimes it is a bit larger than that. It is just enough money to put the team in place, show all the moving pieces of the plan.
With the data from that stage you enter market risk. Can you capture people's imagination? Is there a competitor with a better domain name moving faster? Do support costs grow faster than revenue? These are all market fit questions and they need some capital to show how your product moves into the market and starts to grow. This is where you want to raise just enough money to get to the point where you're cash flow positive and banking the training of delivering, developing, supporting, and selling your thing what ever it is. At which point you're primary risk becomes capitalization.
Often times you'll need chunks of cash to grow, add a data center location, hire a support team in a local market, localize your product for international. These thing take 'chunks' of cash to get going and then steadily burn cash afterwards, you need to raise enough cash in your round C to meet those cash crunches and support the growth to meet your revenue and profitability goals.
In the ideal world once you've gone through a series C you have enough cashflow to grow organically and accumulate reserves for those future 'chunky' expenditures.
On the other hand, if this is the nth startup you're doing and the previous n-1 have netted their investors excellent returns, you can say "Hey I need $5M for this next one, who's in?" and a suitcase of money will land in your bank account. Everyone loves a winner.
One of the unusual ways that playing the card game Bridge is like startup news is that bidding in bridge is saying something which is related to what you have in your hand but not explicitly what is in your hand. And bidding conventions allow the other players to also follow along and guess what you have. So it is with startups and funding. You get a seed round there is enough interest to give you some money, then there is a pause and then either you get a series A and everyone "knows" your basic idea has at least some legs, or you don't and people start to wonder if you're going to flame out. Then if you continue hiring without another funding round everyone gets really excited, but if you did raise the series A people put a pin in the board to check in again with you in a year to 18 months. At which point you're either growing without doing a round, or your out trying to raise a series B. Depending on who you talk to, some folks think series B is the point where you've got a product you have de-risked it to the point where you can get to 1.0. Others think it is the round where you start bringing your vision to market to convince the larger world you're for real. Series C was the "big one" back in the day, that one took you into production and made you a going concern, if you did a series D at that point it was to get ready for your IPO. Series after D were typically "bad" signs of encroaching zombieness or desperation. Not self sufficient, but not clearly established enough that the general public would believe you were going to make it.
So I agree that funding rounds aren't milestones, but they can certainly be interpreted as a count down.