“We like what you’re doing, come back and see us when you have traction.”
Every startup founder in search of seed, late seed or Series A funding has been on the receiving end of this statement from a venture investor. In fact, most have likely heard it more than once. It’s easy feedback for the potential investor to give because (they hope) it preserves the option to invest in future rounds.
Yet it’s frustrating for founders who are left wondering what traction really means.
The answers are typically vague. Sometimes an investor will suggest a few common benchmarks: $100K MRR (monthly recurring revenue) for a SaaS company or X% weekly growth for a B2C company. It’s a mistake to interpret this as an IF/THEN statement – there’s no guarantee that if you reach this arbitrary milestone you will get a term sheet.
I’ve talked to founders who have circled back to investors after having hit their “traction target” only to be told something like, “Awesome that you’ve hit $100K MRR but month-over-month growth is weak and we are concerned about your churn.”
The problem is that there is no objective definition of traction that can be applied to all companies. It can only be understood in the context of your business.
Traction can be thought of as a spectrum from soft to hard. At the soft end is a fantastic looking pipeline and lots of anecdotes about great meetings with prospects and potential partners who tell you how wonderful you are. Great PR and awards fall on this end of the spectrum as well. In the middle, between soft and hard, you find things like early customer references and customer engagement metrics. At the hard end of the spectrum is a repeatable and quantifiable business model that is ready to scale.
Seems pretty straightforward but there is another layer. Investors also look at traction in terms of time/funding to date. You can visualize this as follows.
The more money you’ve raised or time that’s gone by, the higher the expectations for traction. If you are below the line you are executing efficiently and an investor is more comfortable extrapolating continued future progress toward milestones. If you are above the line it’s a flag.
Once you are on the right track and your business model is repeatable and ready to scale, how you got there becomes less relevant. Make no mistake there are still lots of questions to be answered to raise later stage rounds. But then it’s less about traction and more about how valuable the company could be at scale.
Of course this oversimplifies. Here is the key point: the scale of the Y axis and the actual metrics that matter on the X axis are dependent on the particular type of business you are. An e-commerce company, a marketplace, a high and low ASP enterprise SaaS company would all look very different. To complicate things further, the slope of the curve is dependent on the investor you happen to be talking to. It’s a moving target in multiple dimensions and thus the frustration.
Getting off the traction treadmill
So how do you get off the traction treadmill? The only option is for founders to grab the high ground and define what traction means for their business. If you have to ask an investor what traction is, you’ve lost.
Don’t ask an investor what constitutes traction – tell them. You need to demonstrate that you can think rigorously about your business. There are lots of great resources out there to help work through this. Ben Yoskovitz and Alistair Croll have provided the definitive guide to this journey in their book Lean Analytics. It’s a great place to start.