Traction has always been something investors have wanted to see from an entrepreneur seeking business funding. But in today’s tough economic climate, being able to demonstrate traction in your investor pitch, is more important than ever and can often be the difference between ‘yes’ and ‘no’.
The reason traction is so important to investors, is because it typically demonstrates a shift from an idea to something that is on the path to being a profit making business. Traction is progress or momentum. One Venture Capitalist described it to me as being as one ‘measurement of risk’. More traction can equal less risk.
How to Demonstrate Traction
There are many ways an entrepreneur can prove traction to an investor. Here are five :
1. Get sales, customers or users. This is one of the best ways of proving traction. Rather than spend endless months and years perfecting your product, put your energies and creativity into securing customers and users.
2. Recruit a strong management team. As is so often said, a strong team is a huge asset when raising startup capital. It not only provides some reassurance to investors that your will be able to execute, it also amounts to an endorsement of your business and you.
3. Build an Advisory Board. Sticking with the same theme, some businesses would clearly benefit from having ‘experts’ and ‘gurus’ providing advice and general support. If you are able to engage some real ‘names’ in your industry to act in an advisory board capacity, this will also provide some reassurance to investors.
4. Secure Strategic Partners. Whether it’s a manufacturing, distribution, marketing or media partnership, a strategic partnership can be useful evidence of traction. A business that takes advantage of strategic partnerships can utilize the other company’s strengths which can make both companies stronger in the long run.
5. Obtain a Letter of Intent (LOI). For whatever reason, it may be that your business is not ready to acquire paying customers. The next best thing is a Letter of Intent from a large potential customer. The more LOI’s the better.
How Much Traction Do You Need Before You Approach an Investor?
There can be no doubt that the more traction you are able to demonstrate, the more credible you appear. An entrepreneur who pitches an investor without any traction, is likely to be told come back when they have some.
Entrepreneur turned Venture Capitalist, Mark Suster, suggests one way forward for entrepreneurs seeking Venture Capital that have not yet obtained traction. In his blog post ‘The Four Main Things Investors Look For in a Startup’ Suster reveals
“I tell all entrepreneurs that if you want to raise money from VCs you should see them early. If I see your alpha product then I can judge how it develops over time. If you have 2 developers and the next time I see you it’s a team of 6 with a new head of products I can see momentum. If you have beta customers, new pricing plans, different positioning, more market insights, good press coverage – whatever – these are all signs that the ball is moving forward. And it is that momentum that is easier to judge than a single data point.
Some entrepreneurs have said to me, “yeah, but then the VC sees you when you’ve not yet matured and you set a bad initial perception.” Not if you manage expectations. ”We know that we’re meeting you earlier than you’d normally invest. We therefore may not have the full progress you’d expect but we’d like to meet you early so that when we’re at the stage you normally invest you’d have a chance to judge our progress.” Lowering the bar is disarming.
So imagine when the entrepreneur who “isn’t taking investor meetings” comes back for the next funding round. It’s true that I’ll have points A & B. But I would have missed a lot in between. And my “point A” is only determined by what I read in the press since we never had our initial meeting. If the company “crushes it” and has data to prove they’re doing well I suppose it hardly matters. But if they’re like most people it’s harder to measure. Almost every deal I’ve ever funded I’ve gotten to know the founders over time. “
Ultimately, the message is clear. Traction is extremely important to investors so it needs to be important to you. If you want to raise capital, don’t just tell an investor you have a ‘great idea’, tell them you have traction.
Martin is the author of ‘Here’s the Pitch‘ available now from Amazon and Barnes & Noble and all leading booksellers