The Entrepreneur’s Toolkit: Traction

How to Secure Venture Capital: A Series

Steve Gillan, Chief Operating Officer & Chief Financial Officer, Blumberg Capital

This post is one of six posts in our Entrepreneur’s Toolkit series – How to Secure Venture Capital. You can find our other posts discussing the following aspects of what we look for when evaluating potential candidates for venture capital: theme, team, terrain, technology, and terms.

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 business 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.

Showing Traction at the Seed and Series A Funding Level

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.

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? Generally, we look for lifetime value of about 3X – 5X the cost of what it takes to acquire a customer.

• 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.

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.

As we’ve experienced first-hand in the last year, it can be difficult to predict the future of innovation. However, by demonstrating traction – proving deep industry knowledge and the ability to adapt by remaining agile – the more credible you will appear and the more likely to grasp investors’ attention.

Check back for our last blog in the series: terms.

This post is the latest in our Entrepreneur Toolkit series that explores what entrepreneurs need to successfully pitch their idea to investors to secure venture capital. Ready to take the next steps in securing venture capital for your business? Click here to contact us today.