How to Build Your First Use of Proceeds Model for Deeptech Startups

The Strategic Role of a Use of Proceeds Model in Deeptech

For a deeptech founder, budgeting feels different. Unlike a SaaS company with predictable monthly recurring revenue, your costs are lumpy, non-linear, and tied to scientific discovery, not just sales. You are funding breakthroughs, expensive prototypes, and long R&D cycles. This is where a credible Use of Proceeds (UoP) model becomes essential. It is not just a list of expenses; it is the bridge between your technical roadmap and your financial ask. It translates your vision for innovation into a concrete operational plan that investors can understand, scrutinize, and ultimately, fund.

A deeptech UoP model performs two critical jobs. Internally, it is your operating plan in dollars, guiding spending and hiring to ensure your runway lasts long enough to hit key targets. Externally, it is the proof point you show investors to demonstrate capital efficiency and strategic thinking. It answers their fundamental question: “If we give you this money, what exactly will you achieve, and how will that de-risk our investment?”

While a simple list of expenses might suffice at the earliest pre-seed stage, a detailed, milestone-driven UoP becomes non-negotiable for a significant seed round or beyond. It signals that you have moved from a research project to a commercially-focused venture. The goal of the funding is to reach the next “fundable inflection point”—a set of achievements so significant that they unlock the next, larger round of investment at a higher valuation. Your UoP is the map showing precisely how you will get there.

How to Allocate Funding in a Deeptech Startup: A Milestone-First Approach

When your development timeline is uncertain, traditional time-based budgeting can be misleading. The most effective method for deeptech startup financial planning is to work backward from your next fundable event. This milestone-driven approach shifts the focus from budgeting for activities to budgeting for outcomes, providing clarity for both your team and your investors.

Define Your Fundable Inflection Point

Start by defining what you need to prove to raise your Series A. Will it be a working prototype with specific performance metrics? A successful pilot project with a key industrial partner? The answer sets your ultimate target for the current funding round. This target is your fundable inflection point, the collection of evidence that materially reduces the risk in your venture.

With that target in mind, lay out the major technical and commercial milestones required to reach it. A typical runway for a seed round is 18-24 months, which gives you enough time to make substantial progress without over-extending the financing period. These milestones become the anchors for your entire budget. Instead of allocating funds to a generic bucket called “R&D,” you allocate capital to achieving “Prototype V2 demonstrating >95% efficiency” or “Complete pilot project with partner X.”

Every line item in your budget should directly support a specific, measurable milestone. This structure provides a clear narrative for investors and an internal guide for your team. It ensures every dollar spent moves you closer to that critical next round of financing.

Translating Your Technical Roadmap into a Financial Plan

With your milestones defined, the next step is to calculate the costs required to hit them. For deeptech, these costs primarily fall into three categories: People (the team building it), Prototypes (the materials and services to create it), and Purchases (the equipment needed). A fourth category, General and Administrative (G&A), covers essential overhead.

1. People: The Cost of Your Team

Your team is almost always your largest expense. Map your hiring plan directly to your milestone timeline. If Milestone 3 requires a specialized materials scientist, their salary should start in the months leading up to that phase. When calculating costs, never use base salary alone. The fully-loaded cost for an employee is typically 1.25-1.4x their base salary.

This multiplier accounts for mandatory and voluntary benefits. The specific components vary by geography:

• In the USA, this includes employer payroll taxes (Social Security, Medicare, FUTA, SUTA), healthcare insurance costs, and potentially 401(k) contributions. In some cases, US companies can access a research payroll tax credit to offset some of these costs.
• In the UK, the main drivers are Employer’s National Insurance contributions and mandatory pension auto-enrolment. UK-based companies can often leverage R&D tax relief schemes to offset a portion of eligible R&D personnel costs.

For realistic salary benchmarks, founders can use data from sources like Pave and Option Impact to ensure their projections are credible.

2. Prototypes: Budgeting for R&D and Hardware

Estimating prototype costs is a major challenge due to technical uncertainty. Start with a detailed, bottom-up Bill of Materials (BOM) for each prototype version, itemizing every component, material, and external service. Once you have a baseline cost, you must apply a contingency buffer that reflects your technical risk. A generic 20% buffer is not defensible.

Instead, use a risk-adjusted approach to build credibility:

• Low Technical Risk (known process, new application): A 10-15% buffer is appropriate.
• Medium Technical Risk (some novel components or integration): Plan for a 20-35% buffer. A startup developing a new delivery drone would fall here; the components are largely understood, but their integration is novel.
• High Technical Risk (fundamental science or engineering challenges): A 40-50%+ buffer is necessary. A quantum computing startup tackling deep uncertainty in its R&D path needs this higher buffer to be credible.

Justifying your buffer based on specific risks shows investors you understand the challenges ahead, which builds more confidence than presenting an overly optimistic, low-contingency budget.

3. Purchases: Capital Expenditures (CapEx)

Deeptech often requires significant one-off equipment purchases. List these major items and research their costs and, crucially, their lead times. A specialized microscope or reactor might take six months to arrive, a delay that must be factored into your project plan. To preserve runway, consider phasing large purchases. Instead of buying everything on day one, align CapEx with the milestone that requires it. This demonstrates shrewd cash management and strategic capital allocation for deeptech startups.

4. G&A and Other Operating Expenses

While R&D is the focus, do not neglect General & Administrative (G&A) costs. This category typically accounts for 5-10% of your budget and covers the essentials of running the business. This includes legal fees for incorporation and IP protection, accounting software like QuickBooks or Xero, liability insurance, and basic office or lab space rent. Underfunding G&A is a common mistake that can lead to operational bottlenecks later.

Presenting Your Use of Proceeds for Maximum Investor Impact

Your detailed spreadsheet is your internal guide, but investors need a clear, concise summary in your pitch deck. The goal is to present the “why,” not just the “what.” You are not showing a list of costs; you are telling a story of progress and de-risking. Connect your fundraising ask directly to the 18-24 month runway it provides and the specific, value-creating milestones it will fund.

The Summary Slide

A common format for your pitch deck is a simple pie chart or bar graph showing the high-level allocation. An example UoP summary might look like this: 50% Personnel, 30% R&D/Prototypes, 15% CapEx, 5% G&A. This high-level view gives investors an immediate sense of your capital allocation strategy. It is also important to note that the accounting treatment of R&D can vary under IFRS and US GAAP, so having a clear breakdown is helpful for sophisticated investors.

The Narrative of Capital Efficiency

To further build confidence, highlight your capital efficiency. A scenario we repeatedly see involves founders demonstrating thoughtful spending. For example, a battery chemistry company needed a half-million-dollar materials characterization machine, but not until month nine of their plan. Instead of buying it immediately after closing their seed round, they delayed the purchase.

In their pitch, they presented it this way: “Our $2M raise provides a 20-month runway. By phasing our major equipment purchase, we extend that runway by three months, giving us more time to validate our prototype with pilot customers before needing to raise our Series A.” This narrative frames the UoP not as a request for cash, but as a strategic plan for creating value.

The UoP Model's Evolution: From a Plan to a Management Tool

Building your first UoP model brings immense clarity, forcing you to translate ambitious technical goals into a viable operating plan. However, the model's role and the expectations around it will evolve as your company matures.

At the Pre-Seed and Seed stages, investors look for a thoughtful, milestone-driven plan that demonstrates your grasp of the key cost drivers. The assumptions are understood to be directional. The goal is to prove you have a credible strategy for how to allocate funding in your deeptech startup.

By Series A and B, the expectation shifts. Investors will want to see a more detailed financial model, often with variance analysis comparing past projections to actual spending. This means connecting your UoP forecast to your accounting system, whether it is QuickBooks or Xero, and explaining why you were over or under budget in certain areas. This practice demonstrates financial discipline and your ability to learn and adapt, which are critical for long-term success. The core principle remains the same: a well-crafted Use of Proceeds model is your most powerful tool for showing investors you have a credible plan to turn their capital into a de-risked, high-growth company.

If you are just starting, focus on these three steps:

1. Define Milestones First: Before opening a spreadsheet, clearly define the 1-3 major technical and commercial milestones you will achieve with this funding round. These are your anchors.
2. Build a Bottom-Up Budget: Take the time to estimate costs from the ground up for your team, prototypes, and equipment. The exercise will reveal dependencies and assumptions you had not considered.
3. Maintain Two Views: Keep a detailed, month-by-month model for internal planning and a clean, high-level summary for your investor pitch deck.

Frequently Asked Questions

Q: How detailed should my UoP model be for a pre-seed round?
A: For a pre-seed round, focus on a clear, milestone-driven narrative over granular monthly details. Your budget should be built from the bottom up but presented at a high level. Investors want to see that your major cost assumptions for personnel, key materials, and equipment are well-researched and defensible.

Q: What is the biggest mistake founders make when budgeting for hardware development?
A: The most common error is using a generic, indefensible contingency buffer for R&D. A flat 20% buffer signals inexperience. Instead, use a risk-adjusted buffer (e.g., 15% for low risk, 40%+ for high risk) and be prepared to explain the technical uncertainties that justify that specific percentage.

Q: How do I handle R&D timeline uncertainty in my financial model?
A: Anchor your budget to milestones, not months. The model should show the total capital required to achieve a specific outcome, like a working prototype. While you will phase these costs over a projected timeline (e.g., 18 months), include a 3-6 month buffer in your total runway to account for inevitable delays in deeptech R&D.

Q: Should I include founder salaries in my Use of Proceeds model?
A: Yes, absolutely. Founders should pay themselves a reasonable, albeit likely below-market, salary. This should be included in the "Personnel" category. Not paying yourself is a red flag to investors, as it is unsustainable and suggests you may not be fully committed for the long term.