Traction: The Numbers Game
By James Martin
July 29th, 2020
The term traction is a real buzz word for entrepreneurs. But what does this really mean, and how can you, as a founder, effectively and accurately demonstrate it? Whether that be with KPI metrics, active users, repeat purchases or even customer testimonials, we have collated the best advice from VCs and investors from the top investment firms to help any startup communicate their traction in their own unique way.
Quantitative vs Qualitative
At the end of the day, traction is ultimately all about numbers and figures. But let's first be clear which ones, because when a founder reveals traction in numbers that are totally irrelevant to the business, they are doing more damage than good. According to Ann Miura-Ko at Floodgate one of her, "pet peeves" is when founders do exactly that - show data which may be impressive but has no bearing on the company business. In fact, it gives Miura-Ko a bad impression of how founders run their business. Her top tip is to make sure the traction information you reveal is fundamental to how the business operates at the present time and in the future.
Founders ought to give numbers based on their team, users, retained and active, revenues, profits, anything to show a product is gaining attention and demand. It is worth considering leading with a core metrics retention curve, showing a VC you truly do mean business. If you are a marketplace business, share the percentage pocketed per traction, since, over time, your company will accumulate more market power, enabling you to take home a higher amount per transaction. If you are pitching a product for e-commerce, a VC is going to want to know about repeat purchase rates as well as sales and volume of traction. Focus on the Key Performance Indicators (KPIs) that relate to the health of your company. For marketplace and SAAS companies, there is a standard set of metrics for which a company will be held accountable in both the short and long term. Sharing metrics that look impressive but are not relevant to the business growth is not going to entice a VC when you are discussing traction; save that for a later discussion. Lead with numbers, this speeds up the process of securing an investment.
It really is not difficult to understand why demonstrating traction boils down to numerical and quantitative data, particularly once a startup has launched a product. After getting initial traction the only practical, clear and appropriate way to share this with a VC is through numbers. These numbers come in different shapes and sizes, for example, your KPI dashboard or KPI report, which tell the story of your company's (potential) success. The added bonus of sharing your KPI report shows an investor how you, as the founding team, look at and analyse the numbers, which can be just as telling and important for a VC. Ultimately, avoid using vanity metrics, such as the number of an app's downloads and installs, as this doesn't show anything about the product usage. Of course, if you are a B2B startup in the very early stages, it is difficult to use stats to demonstrate traction, so, in these cases you need to use qualitative information that also tells the story of your company. This can range from customer testimonials, stories and reviews, really anything that will give an investor a solid idea of how much traction you are experiencing.
The Big Three
When Sarah Tavel of Benchmark was asked about what she looks for when it comes to traction, she replied, 'the big three'. Firstly, your company has got to have a solid foundation where there is continuing growth, since this growth will perpetuate and provide fuel for the product, team and community. Secondly, having established that your product has basic growth, you then need to demonstrate your users love your product. This can be shown through customer retention - are they coming back to the site to engage with your products and make repeat purchases? And finally, you need to demonstrate your product is self-perpetuating. Simply put, VCs are asking you to consider if you have created a product that brings in enough revenue from current users for you to be able to invest in stimulating further customer acquisition. If you can prove these three metrics, through as much data as possible, a VC might just keep listening.
You Need the Narrative too
Despite most investors being keen to know the metrics and KPIs for your traction data, Mark Suster from Upfront Ventures believes what matters most is convincing a VC you are capable of building a business, where the valuation relative to what they are paying is far higher, and that you have cultivated a product with solid defensibility. The moment a founder can convince a VC they are capable of building a business and deeply understand their market and customers, they can then reveal the data and metrics. Imagine you are a VC, if you buy into the premise and then inspect the data, you are likely to lean in with a positive predisposition. You might not be able to say the same if you see the data first.
Another important factor a founder will benefit from communicating is the momentum your product has gathered. One method of showing this in a clear and detailed manner is by sharing the growth channels, organic or paid, which can demonstrate the opportunity and effectiveness of your product, critical in convincing a VC to invest. Essentially, traction can be an elusive concept. To communicate momentum in the early stages, startups must consider how they verbalize that they have a strong product market fit. Since many standard metrics aren't appropriate for early-stage startups, founders must find unique and individual metrics to describe just how the product resonates with their customers.