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Venture capital funding is a critical step for many founders looking to scale their startups. When asked “How do you decide to fund one company and not another?” Our team points to the Six Ts: theme, team, terrain, technology, traction and terms. In our Startup Growth Toolkit series, we explore the six Ts that founders should consider when growing their startup.
Once you have provided deeper insights into the technology itself, it’s time to show traction.
What is traction in business?
Traction is one of the most pivotal factors in running a successful startup and therefore, a key part of successfully seeking capital – it proves whether you can effectively execute on your business plan. Traction is also key to early stage venture capital investors to give them foresight into potential growth opportunities and longevity of the business.
Take our portfolio company Nexla for example. Since its launch in 2017, Nexla has matured alongside the machine learning market, attaining cash-flow positive status much earlier than most startups and in 2023, was backed with an $18 million investment. By prioritizing a growth strategy that suited their business goals and prioritization of steady improvement over burning capital for a big, but short-lived splash, the Nexla team was able to generate sustainable growth.
Showing Startup Traction at the Seed and Series A Funding Stage
When pre-revenue businesses seek Seed funding, entrepreneurs need to demonstrate traction through ideas, the product itself, a strategic plan to sell the product and, ideally, early positive feedback from customers. For a Series A investment, entrepreneurs should have a greater level of traction with customers or design partners and/or revenue based on the original proof of concept. While an ideal total addressable market (TAM) is a sizable one, by the time of a Series A investment, there should be some market penetration or metrics that can be shown as to how your product is making an impact.
For both Seed and Series A, it’s important to show traction to-date and a realistic timeline for garnering traction in the future along with a go-to-market strategy. Here are some key indicators around traction that VC investors look for and will help to demonstrate traction when securing venture capital:
- Confident sales strategy: First, tell us how you plan to sell your product. Will you take a direct sales or channel approach?
Then, explain your expected investment in selling and how you can most efficiently get your product into the market. Are you increasing margins faster than your costs? If not, tell us how you plan to change that to improve your profit margin.
Recurring revenue or subscription models, where customers commit for a year or more, can indicate good potential traction since it not only can guarantee an annual recurring revenue stream but also can help manage customer churn.
- Cost of customer acquisition and lifetime value: Tell us what you are spending on average to acquire a customer and if it is sustainable in the long-term. This will provide insight into sales and marketing efforts and overall product-market fit.
Showing Business Traction with Customer Valuation
To build on this, determine how much margin an average customer represents, or their lifetime value. How many customers did you win this month and what did you spend to win them? How many years do you think you can keep customers?
- The team’s experience: The founders’ prior roles and successes are an important gauge of traction as well. What did they achieve at their former company? Additionally, what has hiring looked like previously and what does it look like currently? Have you brought on significant players in the market or C-suite employees? If you are able to attract significant advisors or industry titans early on, it will provide reassurance to potential investors.
Looking at Nexla again, their success was built on developing a diverse, experienced team. They hired a mix of remote and hybrid team members, tapping into a diverse workforce and closing skill gaps.
Setting Up for Venture Funding Success – Building the Right Team
It’s also critical to build a team with domain expertise in the technology or service being offered. Having team members with this knowledge focused on sales and marketing proves that sales has been in the DNA from the start. Seeing salespeople on the founding team, who have experience gathering feedback on beta products that can then help inform the final product design and drive contracts from proof of concept.
Economic trends are often volatile, but the value in demonstrating traction is a constant. Regardless of what the market looks like at the time, proving you have deep industry knowledge and the ability to adapt by remaining agile, the more credible you will appear and the more likely to earn investors’ confidence.
This post is the latest in our Startup Growth Toolkit series that explores what founders need to successfully pitch their business to investors to secure venture capital and grow their startup. Stay tuned for the next part in our series: Terms.
For more on the role traction plays in venture capital funding, take a look at other deep dives:
- TechCrunch, Nexla has Defied Startup Conventional Wisdom with Slow and Steady Growth
- TechCrunch, TC Startup Battlefield master class with Blumberg Capital: Make the most of your investors’ expertise
- How to Grow Efficiently and Manage Customer Acquisition Costs: Q&A with Veteran CMO Debora Tomlin