August 17th, 2022 | By: The Startups Team
Continuing in Phase Three of a four-part Funding Series:
Phase One - Structuring a Fundraise
Phase Two - Investor Selection
Phase Three - The Pitch
Part 1 - Anatomy of a Pitch
Part 2 - Market Size
Part 3 - Revenue Model
Part 4 - Operating Model
Part 5 - Customer Definition
Part 6 - Customer Acquisition
Part 7 - Funding
Part 8 - Key Pitch Assets
Part 9 - Traction ( ←YOU ARE HERE 😀)
Phase Four - Investor Outreach
Let’s dive in!
Startup Traction is your opportunity to tell investors how far you've taken the business up until this point. Just having a great idea is wonderful, but generating traction is what truly differentiates you from the pack. Especially in the early days, the only thing better than traction is more traction.
Differentiating yourself from the pack, especially if you’re pitching potential investors, is incredibly important and the best way to show investors that you are more than just a dream is to achieve traction.
How much traction you need varies by the different stages of investment. A handful of early adopters might be enough to start raising from personal connections and angel investors, but you're going to need something more like hockey stick exponential growth and significant market share if you want to get silicon valley VCs to take more than a glance.
Recognize that investors look at hundreds of deals, but the ones that stand out are the ones that are gaining traction. Once you recognize that pitching investors is a highly competitive game, you’ll start to understand why investors have many choices of who to hand a check to. You want to be the most promising choice by virtue of what you have done to generate traction versus what you might do in terms of future growth.
Market traction with daily active users is perceived very differently than concept traction from a focus group within the target audience.
Take a look at how an investor might compare two start ups with good ideas, but a very different traction stage:
Startup Team 1: "We've built a prototype of our product, recruited an engineer from the leading company in our industry, and tested with 1,000 active users."
Investor: "That's interesting, tell me more."
Startup Team 2: "We've got a great idea that we need to fund so we can build a prototype, recruit an engineer, and start testing with a few customers."
Investor: "Let me get back to you (never)."
In both cases, the idea can be exactly the same - but the traction the first team showed is what sets them apart. The investor knows that Startup Team 1 shows the kind of initiative that makes giving them money feel better than Startup Team 2.
You want to demonstrate that you are Startup Team 1. In order to do that, you need to be able to show you’ve made meaningful progress in the critical startup areas — Customers, Revenue, Team, and Product.
You may have other areas where you’ve made progress and by all means, strut your stuff with those other metrics. But those are the four that tend to make startups stand out the most and demonstrate a valid business model.
Customers are perhaps the best way to measure traction, however explaining how committed they are is what really matters. You want to articulate how you are reaching the target audience and what friction they had to overcome to use your product (money, signup path, time invested, etc).
Founder: "We've been signing up customers nonstop through our social media marketing! Every person that tastes our pizza thinks it's amazing and comes back for more! We're building a really solid reputation."
Investor: "Great! How much are you charging?"
Founder: "Well, we give it away for free..."
Investor: "Oh, I think that tidbit matters."
Your Customers are the ultimate validation tool. There is no greater evidence of traction than customers. Anyone can argue the value of your idea, but that argument stops with customers.
You want to put your idea and product in front of customers as fast as you can so you can show that real people have an interest in the product. Aside from demonstrating business traction, it also gives you a sense of whether your product is the right fit for the market.
When articulating customer traction, be very specific about how you acquired those customers, who they are, and how they reacted to the product. Investors are going to use those cues to build a case in their heads for how more of that activity can scale the business to the next stage.
One mistake that is often made is calling “customers” by a single action, such as just those who have paid for the product. That’s typically too myopic of a view to use since customer interest exists at many levels prior to a sale.
Think about how the following cases to see how different perspectives can be applied to what traction means and how we measure traction:
Clicked an Ad - social media follower with interest in your concept.
Signed Up for Newsletter - Registered users who wants to hear from you again.
Began Trial Process - Active users with a strong intent to buy
You’ll want to provide some numbers and a narrative about how each of these stages have performed for your business. All of that is business traction and often it tells an important part of your story that simply showing Revenue can’t tell. At the early traction stage simply driving engagement and increasing the growth of monthly signups shows your startup's ability to reach the right audience and that you're heading in the right direction.
“2,500 people have clicked on our Google Ads for the term “Delicious Home Pizza” and visited our Web site which tells us there is a fair amount of people searching for our product.”
750 people (30%) have signed up for our “Pizza Your Face” weekly Newsletter to get updates on how to create delicious pizza at home. This shows a high intent to engage our message and product on a weekly basis.
100 people (2.5%) have begun our home trial for getting our pizza ingredients shipped directly to them. This indicates a strong interest in actually using our product first hand.”
All of these stages help an investor understand where and how people have engaged the business, but more importantly show that real people (and potential customers) have already leaned in and expressed interest. Even if the numbers are small, the people are real. And that’s the kind of business traction that gets investors most excited.
While the relative value of acquiring customers at various stages can be debated, the value of paying customers from your target market is hard to argue against.
There are always two challenges with showing traction for revenue — either you don't have any money coming in, or what you do have isn't enough to drive sustainable growth. Don't worry, almost every startup deals with this. It's like trying to show your SAT scores when you're in Kindergarten.
In demonstrating Revenue traction you essentially need to touch on three key points:
1. Will people buy? (Conversion Rate) At any price point, have you proven that they are willing to pull out a credit card for your product?
2. How much will they pay? (Price Point) As best you can tell, what's a reasonable price that you can charge that people would pay, even as you scale?
3. How much will they be worth? (Lifetime Value / Churn Rate) Assuming they will buy another pizza from your store, how many pizzas will they buy in a year?
Ideally, you want to demonstrate all three aspects of revenue traction, but in many cases, you may not have sold anything yet. If that's the case, you need to build a case as to why the assumptions you'll make to these answers are based on a strong argument.
Even a small data set can tell a very powerful story, so trying to build small numbers is a very good use of time in the formative stages of a startup.
“We’ve acquired 1,000 new registered users using organic content on social media platforms (People like our product and will talk about it, which helps growth and Customer Acquisition costs.)
Out of 1,000 sign-ups through our email marketing, we’ve had 50 people pay $19 per month for our product. (Real people have validated that they will pay for this - and in this case 5% of them)
On average our customer payments have recurred 3 times, giving us an average yield of $76.” (Not only will people pay, but they will also keep paying which demonstrates there is consistent value)
Assuming you don’t have much traction around revenue it’s OK to skip this altogether and simply say “We have yet to fully explore revenue with in-market customers because we're only going to charge business to business users, but only our free consumer app is ready. We plan on validating some of our core assumptions as soon as possible.”
Among the different factors of business traction, Revenue is the one most likely to be missing from most startup pitches, so don’t feel too bad if you’re not there yet with your own business.
Recruiting a team is real traction. Recruiting a team with great credentials is even better traction. When discussing the value of your team traction you want to dig into how the background of your team maps significant upward movement of the company. Sometimes this can be hard, especially with a very junior team.
If your team has specific credentials, lead with those over everything else. Where you went to college matters a lot less than if you worked on a product that's specifically related to what you're doing now. If you've recruited someone from a notable company that has jumped ship to work on your idea, highlight that. Show that you're able to get real, credentialed people behind your idea.
If you're a junior team without a lot of credentials, try to dig into where your passions lie and why that aligns well with this product. Many junior-level teams have built amazing companies, but it was always tied to a crazy ambition they had around the product itself.
Is the product or service built? How far along is it (and when will it be complete?) If you've built absolutely nothing because you had the idea 9 seconds ago that's one thing. But if you've been working on this idea for 9 months and still have nothing to show for it in terms of a product, or product market fit, not awesome.
Investors want to see that you can create something out of nothing. And everyone starts with nothing. They want to see that you can hustle your way to find resources and more importantly use those resources to get a serviceable product out the door.
Your traction around Product doesn't have to be a complete, functional, shelf-ready version. It can be a prototype. It can be initial progress with the landing page on the marketing site that you're using to say you're "coming soon." It can be the crowdfunding campaign you created to take pre-orders. It can be the demos you did for potential enterprise customers. No matter what business traction you can show, you want to show that you're heads down every day trying to get any aspect of the product moved forward, resources be damned.
Startup Traction is your opportunity to tell investors how far you've taken the business up until this point. With financial projections, different offerings, etc. — the more traction, the better.
The amount of traction you need varies by the various stages of investment. For instance, you'll need a lot more growth and market share if you're looking for VC attention.
Remember, not all traction is equal, so to make your startup stand out, you will need to be able to demonstrate you’ve made meaningful progress in the critical startup areas — Customers, Revenue, Team, and Product.
Pitching investors is an extremely competitive game, so do your best to be the most promising choice by showing what your startup has done to generate traction.
Continue to Phase Four — Investor Outreach