Whatever your pursuit in life, traction will get you far.
Where would Formula One racecar drivers be without good tire traction, or Olympic track stars without firm soles on their sneakers? Both would still be at the starting line, wondering what went wrong as the competition heads into the first turn of the oval.
Perhaps there is no more critical a role for traction than as a vehicle for growth among startups seeking investment.
Neither investor nor startup should underestimate the value of traction. Traction is make-or-break. Traction can send a start-up to the big leagues, while a lack thereof can leave a team scrambling, desperate for that big break, the one you just missed, to return.
Traction, however, can be vague, which is a good thing and a bad thing.
Communicating to investors
The earlier the round of startup funding, the more traction is about a compelling narrative. No one expects a pre-seed company to have a million dollars in revenue – that’s not the right traction point. So pre-seed companies need to make certain they are able to communicate to investors the traction they do have.
For a pre-seed company, that can be a good team – people with solid experience. Do they have an MVP (minimal viable product) yet? Do they have a breakdown of what that product is going to actually look like in a Figma? Have they made any sales? Is it scalable? Are people talking about the company or product? Is the CEO a thought leader? Is there traction around an individual? What is the story behind the story?
That’s a lot of question, but probably nothing compared to what a grilling from an investor might look like.
How investors evaluate startups
The farther a company advances in funding rounds, the more investors will look for revenue milestones and user acquisition milestones. Or, investors will be looking for an explanation as to why there isn’t more revenue, and why there aren’t more users. Is it because there is only “X” amount of money to spend right now on attaining both?
The bottom line is, investors evaluate startups on their traction and growth metrics. Investors are looking for startups that can demonstrate consistent growth in key performance indicators, such as monthly recurring revenue, user acquisition and customer retention.
If it’s early in the game, there’s no need to worry about raising $10 million. Focus on the traction. The world doesn’t have to be saved in 24 hours. Set reasonable expectations and reasonable targets—and hit those targets. This is a process that takes time.
What does need to happen out of the gate is the anticipation of red flags that leave investors saying “No.” Investors are trained to say no to 99.99 percent of deals they see. A startup team’s job is to stay out in front of the investors, and anticipate their criticism and their praise.
Key traction points
It simply can’t be emphasized enough—traction is beyond pivotal, as are the following traction points:
- Product-Market Fit
- Assessing the addressable market
- Evaluating competitive advantage
- Analyzing Scalability
The team behind any successful startup must be able to articulate these four points—along with the ever-critical traction—if they’re going to get anywhere. Here’s what you need to know:
Product-Market Fit. Know who the pitch is targeting. Clearly outline the problem being solved in that market. Show how the startup is meeting a pressing demand and is poised for growth. Do all of this with clarity and, if possible, case studies.
A case study that illustrates how a problem was solved in a small test group is an indication of true Product-Market Fit. But a large case study is even better because a better story can be told, a stronger pitch can be made with more data.
If the case study is a small one, then work that into your pitch to investors. Place a positive spin on this problem or any problem you have.
For example, there is only small case study data because capital is needed to conduct large case studies. Don’t forget to press the fact that capital spent on a large case study will benefit the investor as well. They’ll have more data on which to base a decision.
The golden goose, however, is data that shows revenue. The ideal Product-Market Fit is determined by sales. The trump card is always sales. If you have a lot of sales, investors are more likely to give you capital.
Assessing the addressable market. Meeting a demand and responding to a need in the market are key, but tackling a big problem is just as important. There also has to be a big problem you’re solving in order to receive millions of dollars, or else the investor will never make money.
At the same time, if you set unrealistic growth goals over a two-to-three-year period, investors will ask what planet you’re living on. We see this time and time again. People think they’re going to go from zero users to a million users in two years.
Investors know when stuff is just too good to be true, and they’re going to assume the rest of your presentation is rubbish because it too is going to be too good to be true.
Set realistic goals. That’s more important than going from zero to 90 in 4.5 seconds. Be optimistic, be realistic. Including a growth outline as part of your presentation – as opposed to details of actual growth – can actually be a benefit.
Don’t gobble up everything in one big bite. Take little bites and baby steps. Investors will appreciate your realistic approach.
Evaluating competitive advantage. Do you have any proprietary technology, unique distribution channels, or a strong brand that can help you stand out in a crowded market?
Competitive advantage is a by-product of everything else. If you can clearly explain the Product-Market Fit, then you’ve isolated the problem your startup is going to solve. Next, you should be talking about your competitors, because that’s whom the investors will be asking about.
They’re going to have a simple and straightforward question: If this is such a big problem you’re fixing, why is there no one else fixing it? Competitive advantage is that which your competitors are missing.
Investors want to know why your worldview is so special and accurate? How are you going to use that worldview to gain a competitive advantage over established companies or other startups that are attacking you?
A competitive advantage is a key advantage. Secure a competitive advantage and you’re likely to secure capital from an investor. Then, you can take over the world—or at the very least the market you are seeking to conquer.
Analyzing scalability. If you’re not solving a big problem, if you don’t have a path to a big exit – $100 million, a billion dollars, whatever your big goals are – investors won’t get excited and that means no capital.
Investors don’t care about small gains. The investor game is bet on 10, lose nine. Investors want to know how you are a scalable opportunity. Do you have a customer acquisition channel? If you do, how is that going to look at scale? Talk a lot about that. Talk about tying Total Addressable Market, or TAM, to scalability.
Why enable startups
Startups are not just about solving pointless problems. Making that assumption is a common mistake. And their goal is not to simply make a bunch of money. Startups are all about tackling some of the biggest problems that humans encounter on a day-to-day basis and finding solutions.
The more capital invested in startups, and the better they can clearly explain their traction and traction points to investors, the greater the chances are that they can solve the biggest problems of the moment.
What everyone should be promoting is: How can we support startups that carry merit and inspire possibility? We should be enabling startups to raise as much capital as possible because startups – we’ve seen this time and time again – can change the world.
Think Amazon. Think Apple. Think AirBnB and Uber.
The possibilities generated by a solid startup team can seem endless. But securing capital for great ideas remains elusive if those teams are unable to clearly communicate to investors how they are gaining traction, and running rings around their traction points.
The five traction points are obviously not everything. But they’re a lot. And if you’re missing the boat on just one of these points, you’re at a serious disadvantage that can take you out of the game in the blink of an investor’s eye.
Become an absolute pro. Get investors to bet on you. Offer solutions. Solve problems. Win the day. Change the world.
This is the startup game.
Michael Hummel is the founder of Establish, a strategy-based growth agency for startups. The company leverages its knowledge of early-stage business investing to advise clients and help startups grow and get attention.