At XSeed Capital we are introduced to over 500+ new startup opportunities every year, and we directly meet or talk to 150–200 of these companies. In this context, I am sometimes asked what is the “biggest mistake” that a CEO or management team makes when pitching venture capitalists. While there are several that come to mind, I remain surprised at how frequently even experienced entrepreneurs struggle with a simple question:

“What are you going to accomplish with this round of financing?”

In an unexpectedly large number of conversations and meetings, instead of hearing proposed measurable milestones, investors are given a “to do” list of activities from entrepreneurs: hire some engineers, launch the first product, get some revenue, do some marketing, etc.

In a world of staged funding rounds, an idea that my Stanford colleague, Robert Burgelman, and I wrote about in 2007 can provide entrepreneurs with a way to think about how they should contemplate what needs to be achieved with each infusion of capital and the size of the round they are raising: the Minimum Winning Game (MWG).

Originally, we described the Minimum Winning Game as:

“Defining the first major market opportunity that is limited enough to provide a clear target for technology and product development efforts in the short-to-medium term, and sufficiently large that successfully pursuing it provides a foundation for longterm corporate development.”

Note that this is very different than the Maximum Winning Game: the goal of achieving somewhere between $50 and $100s of millions of dollars in revenue within a fixed time period (often within 5–7 years).

In the context of a startup, the idea of the Minimum Winning Game can be applied to how entrepreneurs need to lay out the goals they hope to achieve with each new round of outside money. Since subsequent rounds of funding are often required for a startup, entrepreneurs want to mitigate various risks through each funding stage so that they can raise the next round of capital at a higher valuation each step of the way.

What are examples of good milestones? They could include the following:
* Achieving revenues of a certain level by a particular date
* Having a minimum number of paying customers at the end of a quarter
* Specific hires in key functions (including the executive team)
* Attaining a target growth rate at the end of the funding round
* Launch of a version of the product with specific features on a given date.

The various risk factors of a technology startup fall broadly into three buckets: technical risk (can it be built?), execution risk (can this team build it?), and market risk (will customers buy it?). Entrepreneurs need to focus on coming up with measurable milestones in each of these categories, and then build a budget to achieve those objectives. In one respect, this is the Minimum Winning Game for a startup in each round of funding: Accomplish enough product and market success so that subsequent investors will want to supply more capital to help grow the business to the next level of achievement.

If one thinks of each round of funding as a series of “base camps” that mountaineers use to reach the world’s highest mountains, each infusion of capital is like a subsequent base camp at a higher altitude: a place to add supplies and materials (headcount), to recalculate the risks of a climb (adjust strategy) and to prepare for the next step in the journey (mentally get ready for the subsequent set of challenges that a company will face). Each of these steps is a new Minimum Winning Game in the excursion of a new commercial enterprise.

So, when a VC asks an entrepreneur about what will be accomplished with the next round of funding, entrepreneurs would be well-served to think of what is the next Minimum Winning Game that their company needs to win in order to have a chance to achieve their goal, and what measurable milestones the team will use to keep score and know if they are winning the game in which they are playing.

Robert Siegel is a General Partner at XSeed Capital, and his investment areas include enterprise software, business operations where computational technology helps automate/improve company performance, and computing platforms that shape both business and consumer behaviors. He is currently on the faculty at the Stanford Graduate School of Business. Prior to XSeed, he served in upper management at GE Security, Pixim (acquired by Sony), Weave Innovations (acquired by Kodak), and Intel.