Progress Can Make Your Company Harder to Fund

Here is one of the stranger realities of the private capital markets: a company can become objectively better and simultaneously become harder to finance.

That sounds backwards, right?

Investors are supposed to reward progress. You complete the clinical trial, get FDA clearance, launch the product, sign customers, grow revenue, land the strategic partnership. Risk comes out of the business, so presumably the valuation goes up and the next round gets easier.

Not always.

I’ve seen this play out many times. A CEO comes back to market 18 months after the last raise having done most of what the company said it would do. The science is further along, the product is better, there’s more data and validation, and sometimes even revenue. And yet the next round is harder. Investors ask more questions, push harder on valuation or just don’t show the same enthusiasm they did the last time around.

What’s going on? Usually the company hasn’t gone backwards. The investment case has changed.

Every meaningful milestone retires one risk and exposes another. As the evidence builds, investors gradually stop paying for what might happen and start paying for what the evidence says is actually happening. Let me explain the paradox:

Why good news can lower the price

Early-stage valuations are based partly on a range of possible outcomes. The company might fail, become a solid business or become something enormous. Nobody really knows yet, and part of what an early investor is paying for is that open-ended upside.

Great results can push that whole range upward. Poor results clearly hurt. But what if the evidence is good, but not great. Investors may become more confident that the company can succeed while becoming less confident that it can become something truly exceptional.

Good evidence reduces uncertainty. It doesn’t necessarily increase expected value.

There’s another issue I often see that makes this harder. Companies tend to build their plans around the assumptions embedded in the last financing. They hire, increase burn and expect the next major milestone to support a step-up in valuation. If the evidence instead points toward a more bounded outcome, the company can suddenly find itself with a narrower financing story and a cost structure built around the broader one.

That’s the awkward middle: too much evidence to be valued entirely on potential, but not yet enough evidence to be valued on fully demonstrated economics.

Where I see this most

Biotech is probably the cleanest example. A preclinical biotech can support a substantial valuation based on its mechanism, preclinical package, IP, team, size of the indication, etc. Everybody understands there’s a lot of risk, but there’s also room for a very large outcome.

As the company moves through the clinic, the picture starts to become less theoretical. Phase 1 may answer important questions around safety and tolerability. Later studies begin telling investors much more about efficacy and, just as important, how meaningful that efficacy really is.

Take a Phase 2 trial that hits its primary endpoint but shows a modest effect. Scientifically, that’s good news. The program has advanced and the probability of eventual approval is now higher. But investors now have an actual effect size they can work with. They can model peak sales with more confidence, compare the therapy with the standard of care and get a clearer read from KOLs on where the product might fit.

All of this changes the math. The probability of some commercial success may have gone up while the probability of the very large outcome that helped support the earlier valuation has gone down. The company is further along and arguably less risky, yet the next financing may still be harder.

I see the same thing with medtech companies around FDA clearance. Before clearance, much of the financing story is about whether the product can get to market at all. After clearance, investors start focusing much more on whether the market actually wants the product badly enough to adopt it at scale.

That means looking at things like hospital adoption, reimbursement, sales cycles and how much behavior has to change for docs to use the product. Then the first sales come and the picture sharpens. A hospital may love the device and still take a year to move it through their value-analysis process. Physicians may need more training than expected. Reimbursement may be straightforward in one setting and messy in another.

None of this means the company is in trouble. It’s probably in a much stronger position than before clearance, but investors are now seeing how commercialization is actually unfolding instead of underwriting how everyone hoped it would unfold.

Software companies run into this same issue earlier. Once there are a few million dollars of ARR, investors no longer have to imagine growth and retention; they can measure them. A SaaS business with $2 million of ARR growing 35% annually might be a perfectly good company, but the operating history has started replacing some of the optionality that existed when almost everything was still forward-looking.

Sometimes you need different investors

This is another place where founders get tripped up. If the investors who liked the company at the last financing aren’t as interested now, the natural reaction is to assume something must have gone wrong.

Maybe. But maybe the company has simply become a different investment.

A VC fund, specialist healthcare investor, strategic, family office and UHNW private investor can all look at the same company and reach different conclusions because their return requirements, time horizons, appetite for specific kinds of risk and sector are all different.

If the new evidence points toward a strong but somewhat more bounded outcome, the company may no longer fit a fund that needs the possibility of a massive return from every investment it makes. The same company may make much more sense to another investor.

Family offices and UHNW investors are especially difficult to generalize about. Some invest very much like institutions and others have more flexibility around time horizon, ownership, structure and what they consider an attractive outcome. That flexibility matters for companies sitting in this awkward middle.

So I wouldn’t treat a cool reception from one part of the capital market as an objective verdict on the company. Sometimes the investment case has changed enough that the investor universe should change too.

What I would do about it

The first thing is to think about milestones differently. How so?

Founders naturally view them as achievements. Investors also view them as new information, and new information can reprice a company.

Look at public companies, who have understood this forever. Results are judged relative to expectations, which is why they spend so much time setting those expectations before earnings, and then explaining what the numbers mean afterward. Private companies should bring some of that same discipline to clinical readouts, FDA decisions and major commercial milestones.

Before an important milestone, management should already know what it would consider an exceptional, good or acceptable result, as well as what would cause it to rethink the plan. If you don’t have that framework before the evidence arrives, investors will create one afterward, and they’ll often compare you with the best-case outcome.

In biotech, that may mean knowing beforehand what effect size is clinically and commercially meaningful. In software, it could mean making clear that the next 12 months are about building a repeatable enterprise sales model rather than simply maximizing revenue growth. You’re not promising an outcome. You’re defining what the company is actually trying to prove. Companies should be thoughtful about how they communicate this and involve counsel where disclosure questions arise.

Runway matters just as much.

One of the worst negotiating positions in private capital is needing to raise money immediately after ambiguous data. If you’re heading toward a major value-inflection point, you want enough cash either to get well beyond it or to give yourself time afterward to explain what happened and execute the next step.

A company with three months of cash after a complicated clinical readout doesn’t have much opportunity or the leverage to shape the interpretation. It has to transact, and everyone across the table knows it.

Management also has to interpret the evidence before the market does. Clinical results, early commercial numbers or customer data rarely tell the whole story on their own. You have to explain what the evidence proves, what it doesn’t prove, how it compares with the right benchmark and what uncertainty still remains.

This is NOT about “spinning” mediocre results. Sophisticated investors see through that quickly. I’m talking about context. If you don’t provide it, investors will fill in the blanks themselves, and always more conservatively. Their interpretation can easily become your valuation.

The financing story itself also has to move forward. Most decks spend a lot of time showing what the company has accomplished since the last raise, which is important because it shows execution. But the new investor is really underwriting what the next dollars will accomplish.

Raise against the next question, not the last accomplishment.

The cleanest version of that story is pretty simple: here’s what was uncertain at our last financing, here’s what we now know, this is the biggest thing we still need to prove, and here’s what this round allows us to do about it.

That’s a much better use-of-capital story than simply saying, “Look how much progress we’ve made.”

I’d also spend more time thinking about what kind of risk each prospective investor actually wants. Founders understandably screen for sector (biotech, medtech, SaaS, AI, whatever), but sector fit is only part of the equation.

Some investors are perfectly comfortable taking clinical risk but don’t want early commercialization risk. Others won’t invest before FDA clearance but are happy to wait several years for adoption to develop. A strategic may immediately understand a market dynamic that makes a generalist uncomfortable. A family office with real sector experience will look at the exact same evidence very differently from a traditional VC.

Understanding what kind of uncertainty an investor is actually willing to own can save an enormous amount of time. One of the easiest ways for a good company to waste six months is to keep trying to convince investors to take a type of risk they never wanted in the first place.

The real lesson

None of this is an argument against progress. Hit the milestones and build the evidence, but don’t assume the market will read each achievement the way management does.

The questions investors ask after a clinical readout are different from the ones they asked before it. FDA clearance changes the questions again, and so does first revenue. Companies that handle those transitions well think through the financing implications before the milestone arrives, keep enough runway to manage the outcome, explain the new evidence clearly and make sure they’re talking to investors who actually want the risks that remain.

If they don’t, the market will still decide what the progress means. It’ll just do it without them, and by then it may already have decided what that progress was worth.