You have an innovation company, a startup. You know you need money to grow. So, who do you talk to? How do you figure out how much money to raise?

In a recent Tweet storm, Frank Rotman of QED Investors said: “A startup is a simple beast at its core. A team is assembled to build a solution to a perceived problem with the goal of distributing and selling it such that economic value accrues to the provider of the solution.”

While this definition seems simple at its surface, when broken down there are a multitude of unanswered questions: Can you hire a team? Can you build a product? Is the problem real? Is it solvable? Does anyone care? Do lots of anyones care? Can you find these anyones and sell to them? Can you do that at an attractive cost and price? Can you execute to your customers’ satisfaction? Will you be able to manage your growth? Will competitors show up and take your markets?

These are risks to your startup. They’re also risks to the investment outcome of an investor.

For investors, deciding to give money to a startup is a game of managing risk. Certain types of investors, such as angel investors, are willing to take on higher risk for the chance of higher reward. They invest when your company is worth much less. Your company is valued at a certain level because you have hurdles ahead of you. But as you mature and grow your business, you leap those hurdles—you prove things.

As you travel farther along the investment path (think Series B and C rounds), the amount of hurdles to jump—and the risk to the investing party—are less, so your company is valued more highly. The return potential to investors is also lower, but more certain.

Investors weigh risk in terms of the “milestones” a startup has achieved. These milestones are things the startup has accomplished that show—prove—it is on the right path and thus serve to reduce the investor’s risk. Understanding what these milestones are and aligning capital strategies accordingly can help founders get the capital they need.

Hit Milestones to Reduce Risks

Let’s look at typical startup risks in more depth:

  • Can you hire a team? Team Risk.
  • Can you build a product? Technical Feasibility Risk.
  • Is the problem real? Product/Market Fit Risk.
  • Is it solvable? Feasibility Risk.
  • Does anyone care? Product/Market Fit Risk.
  • Do lots of anyones care? Desirability / Product/Market Fit Risk.
  • Can you find these anyones and sell to them? Market Segment and Size Risk.
  • Can you execute to your customers’ satisfaction? Operating Risk.
  • Will you be able to manage your growth? Scale Risk.
  • Can you do that at an attractive cost and price? Business Model Risk.
  • Will competitors show up and take your markets? Economic Value Capture Risk.

Different innovation companies have different risks, though most have the core risks above. Others add regulatory risk—think FinTech and Healthcare IT, as well as Intellectual Property risk. Some companies are also more difficult to finance and therefore have more significant financing risk. Each company is unique.

Milestones are achieved along each startup’s journey. Each time a milestone is reached, conquered, and proven, risk is reduced for the investor and their risk/reward ratio also goes down.

You can manage what you are doing to help fit risk elimination into a milestone. For instance, I was recently discussing what investors would like to see accomplished prior to the next round with a healthcare tech investment. Their plan contemplated beta of new software, but not verifying the efficacy of the offering being completed prior to the anticipated date of the Series A. I told them that I thought their raise would go better and their value would be higher if they could work measured results into the period before that raise. The duration from beginning product usage until the need for funds didn’t seem to allow it. We brainstormed several alternatives that would provide the proof without waiting for full customer results.

Who Invests and When

So how much money do you need?

Enough to get you through the next milestone or two as well as a cushion because it always takes longer and costs more than you estimate. This way, you sell the least size sliver (dilution) of the current pie, enabling you to sell the next piece when the pie is larger.

Who do you talk to?

Each different class of investors is willing to absorb different levels of risk. There are you and your balance sheet first, then friends and family, angel investors, early-stage investors, and finally growth investors. Each of them has promised their source of capital a different level of risk and potential return. They each align with different stages of the startup’s journey—or they can if you align your plan with intention.

As an example, angel investors come in early when the biggest concern is product feasibility. Angel investors are known as such, since to startup founders they can indeed be “angels,” often investing in the most unproven companies. Still, such angels expect at least a minimum viable product, not just a concept or idea, if an investment is to be offered.

In comparison, early-stage investors, such as those funding Series A rounds, are concerned with market risks. They want to know that there is a sizeable market and demand for the solution. They’ll likely expect that the startup has a product with beta users or has even achieved some sales.

Investors who fund later Series B and C rounds are typically focused on operational risks. Their main concern is whether the startup can scale to effectively support HR, sales, and marketing so that revenue goals can be achieved. With such latter rounds of funding, companies being invested in are pretty much a “sure thing” that just need the operational capital to support continued momentum and growth.

Startup founders should align with investors who are willing to absorb the risks at each stage of their growth. This is why founders are usually wasting their time pursuing a later-stage investor when they have a minimum viable product and beta customers, for instance, but not much else.

Bottom line, as the startup puts more milestones in its rear-view mirror, the type of investor it appeals to as well as the amount of investment goes up, while the actual risk to investors goes down. And every milestone reached is a validation point for helping to get to the next level of funding.

Milestones, Not Calendars

As an investor, one thing I explain to founders is that at each funding round they need to raise enough money to hit their next milestone. Otherwise, they haven’t eliminated the risks that the next stage of investor will expect to be gone. In this case, the investor is likely to think the startup “isn’t there yet” and will take a pass.

Instead of focusing on hitting their next milestone, founders often incorrectly think of funding in terms of time. They’ll rationalize, “I need to raise enough money to get us through the next 18 months or to the end of the calendar year,” while they should be figuring out how much capital they’ll need to knock out their next milestone so they can interest the next investors.

While it’s possible for the next level of investor to take a chance and still invest in a startup even if an expected milestone hasn’t been met, it’s likely to result in a down round of financing and a lower valuation that doesn’t accurately reflect the company’s achievements or potential. All because that milestone wasn’t knocked down to eliminate the level of risk appropriate to that investor class.

Startup founders who base their capital strategy on reaching the next milestone, and who understand that different investors invest at different stages in a company’s trajectory and at different levels of reward and risk, will come out ahead in the game.