Almost every early-stage startup who has approached investors for funding has heard the innocuous sounding rejection “I love your idea, but come back when you have more traction.” What does traction really mean to investors, and how much is enough? Let me try to clarify the rules, and what it takes to win at this game.
First of all, a definition. Traction is evidence that your product or service has started that “hockey- stick” adoption rate which implies a large market, a valid business model, and sustainable growth. Investors want evidence that the “dogs are eating the dog food,” and your financial projections are not just a dream.
Obviously this definition is generic, so my first recommendation is that you take the lead in defining traction metrics for your startup, and then selling your results convincingly to investors. A graph that shows a hockey-stick “up and to the right” curve with at least three data points per key indicator is a great visual assist.
One or more of the following parameters are viewed by most investors as traction indicators, but good entrepreneurs are often creative and define their own to supplement these:
Start with sales to-date for a priced offering. As an investor, I would like to see one month of sales, and see how that compares to your projections. One customer is not traction, and beta tests with a thousand customers at no cost don’t count. Your graph should show that sales have “turned upward” per projections, beyond friends and family.
Free and freemium products need a solid base. If your product is free, with advertising revenue from click-throughs, you need a sign-up rate and page-view rate that approaches one million page views per month. I like to see at least 10,000 active users, or a user base, page-views, or mobile downloads that double every three months.
Market penetration. Percentages may be difficult at this early stage, but you need to get creative about slicing and dicing the market, sector, demographic, and sub-categories. For example, if your value-add is with first-time parents, show me a graph of how many 20-30 year-old moms have signed up each week the first month.
Average transaction size and revenue per customer. Often enterprise customers, or even consumers, test a new channel by signing up for a few small transactions or trial products. If your average transaction size, number per customer, or margins have been turning up dramatically, it should mean you have gained real traction in the market.
Customer acquisition cost. In an inverse fashion, real traction usually means that your cost to acquire a new customer is coming down rapidly, as your marketing kicks in, and your offering is known and accepted by the mass market. You need to position these numbers to investors as positive, based on your domain experience, before being asked.
Show acceptance by major customers and key distributors. Sometimes it is not the numbers that indicate traction, but who you have signed up. Signed contracts with big name customers, like IBM, AT&T, or Wal-Mart, is a strong indication of traction. The same is true if your offering has been accepted by major distributors in your industry.
Public statements from industry experts and groups. In the enterprise world, if your offering is even included as a new contender by respected industry groups, like Gartner Research, you should claim traction. In the consumer world, groups like Consumer Reports, will give you similar credibility, if positive. Start early to work these relationships.
You need to take the lead in choosing the key metrics that accurately and positively express, both quantitatively and graphically, that your startup has broken through the traction barrier. Don’t ask investors if you have traction – if you have to ask, you probably won’t like the answer.
But never forget that traction is necessary, but may not be sufficient, to lower the risk perception of investors, and assure an investment. The quality of the team, and overall financial health are equally important, as well as how your offering compares to competitors.
Overall, you should think of traction as that indicator or indicators which demonstrate that your offering has shifted from being an “idea” to being a profit-making “business.” As such, it should be just as important to you as to potential investors. Make sure you understand what it means to you, and communicate where you stand. If investors have to raise the subject first, you don’t have enough traction to win.
*** First published on Young Entrepreneur on 02/18/2013 ***