Wednesday, June 22, 2016

Traction Metrics Seed Real Startup Funding And Growth

Hiriko_1Almost every entrepreneur looking for outside investors has heard the annoying rejection, “You are just too early – come back when you have more traction.” That should make you wonder - how do you measure traction in a metric? If it’s so important to investors, perhaps you should be using traction to measure your own progress, independent of a need for additional funding.

According to most experts, business traction is evidence that somebody really wants your product. It’s business momentum, independent of whether you have a product delivered, proven the business model, or significantly penetrated the opportunity. Admittedly, it’s not as precisely defined as financial ratios, but every savvy business person recognizes traction when they see it.

While thinking about the parameters of traction, and how to measure it, I was impressed with a new book, “Scaling Lean: Mastering the Key Metrics for Startup Growth” by Ash Maurya, a serial entrepreneur, and creator of the one-page business modelling tool Lean Canvas. I like his set of action items, and have added a few of my own for measuring early traction leading to growth:

  1. Turn initial customer goals into measurable traction metrics. These need to go beyond the traditional revenue, cost, and volume metrics which may not yet have data, and can mislead you about real customer acceptance. Early examples would include website traffic, positive reactions from potential customers, and blogger support.

  2. Build outside relationships with media and analysts. It’s never too early to build relationships with industry analysts, influential bloggers and the media, and show how these have grown over time. These show real traction even before you ship a product through heightened anticipation and pre-orders. Visibility increases over time are traction.

  3. Build an inside advisory board of influencers and experts. Customers and investors alike measure traction by your formal advisors. If Bill Gates has agreed to be on the board of your software startup, that’s major traction, even with no paying customers. In addition, advisors of this caliber will accelerate growth by experience and connections.

  4. Validate every key element of your business model. Use experiments to test every element of your business model – cost, price, marketing, sales channel, customer acquisition cost, lead conversion rate, and lifetime value. Traction is the measure of how many of these have been validated, and their projection to your business valuation.

  5. Show increasing acceptance by major consumer outlets. Traction starts with calls returned, positive expressions of interest, signed letters of intent, and contracts in place. Each of these should be measured and celebrated internally, as well as communicated to investors and other constituents. Continued activity drives momentum and growth.

  6. Benchmark your business progress as a customer factory. The job of every startup is to make customers. Like a factory, it starts with attracting potential customers, creating delivering, and capturing value from these customers, to creating happy customers out the door. These customers bring in many new ones as traction and growth multipliers.

  7. Define known growth constraints and breakthroughs. Growth constraints would include staffing shortages, funding needs, quality problems, and sales coverage. Traction is the removal of a constraint, and the identification of the next bottleneck. A useful traction metric is how many constraints have been removed, with resolution times.

  8. Show evidence of growing and unsatisfied customer demand. If you have orders in hand from recent trade shows that you can’t satisfy without funding, that’s traction that will appeal to any investor. If the rate of order arrival has doubled over the past month, that shows traction, momentum, and growth. Use these metrics rather than hide them.

Don’t wait to be surprised too late by conventional revenue metrics indicating passion has masked a lack of early traction. Define realistic traction metrics to validate your business goals and funding needs.

Talking longer and louder to me as an investor or advisor won’t convince me you have more traction, and it won’t add anything to your bottom line. Traction and growth are not about emotion.

Marty Zwilling

*** First published on Forbes on 06/14/2016 ***




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