Struggling to get investment? There is one thing your startup needs

Benjamin Chong startups

Right Click Capital partner Benjamin Chong.

It’s the feedback that has shattered the dreams of many founders. That moment when an investor says: “You’ve got a great business, an innovative idea, you’re a passionate visionary with huge potential … but I need to see traction before I write a cheque.”

Traction is the difference between the success and failure of a business, and the ability for a founder to secure the funding they need to take the business to the next stage. It is a deal maker, and a deal breaker, for investors.

So what is traction?

Traction is momentum. It is a measurable set of customers or users that allows a founder to demonstrate their big idea is more than just an idea; it is a viable business and the founder is on the journey to product-market fit.

It demonstrates they have established evidence there is a sizeable market for the product, and there are green shoots of sustainable growth.

A startup doesn’t even need to be profitable to demonstrate traction. Instagram had a large customer base before it was able to experiment with ways of monetising this rapidly expanding user base. It had enough traction to persuade investors to part with their money even without clarity on how it would eventually make money.

Measures of traction will differ based on a startup’s business model and they are dynamic, changing throughout the life stage of the business. Early stage startups are still very much trying to show people will use an app that finds dog walkers in their neighbourhood. Later stage businesses need to show dog owners are willing to pay for this convenience regularly and love the idea so much they will recruit other pet lovers.

Early stage startups should start by defining relevant metrics

Founders first need to know the traction metrics for their startup. This isn’t always straightforward.

The easiest way to get a handle on these numbers is for founders to spend time engaging with potential customers, often referred to as customer development. Founders should be looking to talk to everyone who signs up, hold their hand, bring them on board as advocates and, of course, talk to them about the benefits of becoming a paying customer. This closeness allows the founder to see how customers might use the product, the application the new product is replacing and how the customer themselves measure the use of the product.

A founder recently pitched to me an exciting new business in healthcare technology that allows GPs to reduce the time spent on certain types of consultations. As an investor I was looking to understand how doctors value the efficiency this product brings and the impact on their profitability. I wanted to know if the doctor uses the technology ten times a day and it allows them to claw back time to treat an additional 20 patients every week. Or is this is a relatively infrequent request where time savings due to technology have little impact on the doctor’s ability to see and bill more patients?

Most importantly, I wanted to know the feedback from doctors and if this easily translates into actual sales for the founder. This is the product-market fit that is vital in early stage traction and shows the founder can convert the first wave of users to paying customers because they value the product.

Metrics for more mature startups

A mature startup will have a good understanding of the lifecycle of the customer, whether their pricing is right and whether there is elasticity in this pricing. They will know how much they can they charge for the product and how long they can keep the customer for, as well as having rich insights into customer behaviour.

The metrics used for measuring traction of later stage startups become more standardised. For a mature software app for instance, investors will want to understand the behaviour of existing users. Specifically, they will be looking at the daily, weekly and monthly usage patterns of users. Of the 100 users who open the app in a month, what is the percentage who open the app every week and what percentage open it every day?

Founders of these later stage startups should benchmark their vital user stats against a relevant peer. For example, WhatsApp has a daily average user (DAU) to monthly average user (MAU) ratio of 70%. This means that of 100 users who open WhatsApp in a month, an average of 70 users will open it on a daily basis. This is a high-water mark! For the same measure, Facebook sits at 66%. For a restaurant booking app, founders may consider how often, on average, people visit restaurants and use this to adjust their benchmark.

There are also metrics such as new monthly customers, customer churn rates, and viral or user coefficient measures (for every one person that signs up, how many will they get to join?) that will demonstrate traction. Session length and the number of installs are additional measures, and, naturally, revenue trajectory is also of great interest.

Generating traction is challenging at any stage of the startup journey but eventually traction turns to growth, which is a universal language.

For those founders who are seeking initial funding, having passion in the product, knowing the market, plotting a pipeline, and building an early fan base that demonstrates paid conversions, are what makes traction evident and attractive for potential investment.

NOW READ: When to pop the question: Will you invest in me?

NOW READ: Why legaltech Josef’s $1 million raise was more about securing experts than cash

You can help us (and help yourself)

Small and medium businesses and startups have never needed credible, independent journalism and information more than now.

That’s our job at SmartCompany: to keep you informed with the news, interviews and analysis you need to manage your way through this unprecedented crisis.

Now, there’s a way you can help us keep doing this: by becoming a SmartCompany supporter.

Even a small contribution will help us to keep doing the journalism that keeps Australia’s entrepreneurs informed.

Trending