When putting together a compelling pitch for startup funding, there are a few key things that a potential investor is looking for in your pitch deck. One of these, is traction. Or in non-startup-speak “the success you have seen so far with your targeted customer group”. In today’s crowded fund raising climate, you need more than just a good idea. A clear idea of the market size, an understanding of your competition, a strategy to launch and scale, and of course, traction. Traction, customer proof, customer validation.. you say potato, I say potahto. Top put it in other words, you need the answer to an all important question “what proof do you have that customers are willing to buy your product/service?” Well? Do you have any proof?
Why Does Traction Matter?
Why does traction even matter, you might ask. Well it’s simple. Your potential investors (and potential customers) need to know that you are a safe bet. They want to feel confident that with their money, you and you’re team will be able to hit the targets you’ve laid out for yourselves. They need you to de-risk the investment as much as possible. Already having customers or at least proof that your customers are interested in buying your product goes a long way towards building confidence in your concept and future success.
Types of Customer Validation
There are many ways to speak to your company’s traction gained thus far. Some are more impressive or valuable than other. As a general rule the more tangible the proof, the more it will truly “prove” you have customers in the eyes of potential investors. While the more indirect and intangible ways of showing traction are less
Types of Customer Validation
- Direct / Paid
- Direct / Unpaid
- Indirect / Quantitative
- Indirect / Subjective
Direct / Paid Traction
This is the best kind of traction you can have. It is both direct and paid because it literally counts the number of sales, pre-orders, or revenues that you have received thus far. Having actually paying customers to point to as successes is a great way to show the traction you’ve been able to gain in the market. Keep in mind that while any revenue is good revenue, the closer your offering and price point are to the proposed product roll out and future company trajectory the better. You can’t prove that your App will work because people bought Tshirts. It needs to be relevant.
Direct / Unpaid
The second best type of customer validation that you can have is direct & unpaid. Perhaps you’ve not quite gotten enough of an MVP put together to charge potential customers yet. That’s ok. This kind of traction is all about Beta sign ups, website visits, and letters of intent. It’s not money in the door, but it’s getting close. Here you are showing real tangible interest, all that’s missing is the payment.
Indirect / Quantitative
If you’re early stage and don’t have a product yet or even an MVP, you likely won’t have any direct traction that you can point to. But, don’t give up on this slide. You still need to show whatever you can show that you’ve proven the model and talked to your customers. Things like user polls, general or specific statistics gathered by a third party about your target customer group are good ways to show numbers that can be used to infer likelihood of intent & validation.
Indirect / Subjective
As a last resort, if you have nothing else, at least talk to your customer group. Do interviews or focus groups. Gather testimonials from the kinds of people you hope to sell to, attesting to their interest in or the value they see in your company once it’s off the group. These numbers are less hard, and there is not a lot of “proof” in this form of customer proof, but it is better than nothing. Show your potential investors that you are trying to de-risk their investment as much as you can at your stage.
What Kind of Traction You’ll Need
Depending on what stage your company is, what industry you’re in, what business model / type of business you’re running different levels of traction will be expected by potential investors. On top of that, different investment rounds (seed vs. Series A for example) come with different expectations in terms of customer proof, as well as different investor groups themselves. Angels and VCs tend to invest in companies at different stages and expect different levels of customer validation.
Early Stage & Angel Funding
No grouping & labeling is perfect–and these days many angel investors have started to act and invest more like micro VCs–but on the whole angel investors invest in earlier stage companies. For early stage companies, the burden of customer validation is significantly lighter. While more is always better than less, there is some room for gaps in this area for these companies. This makes sense because generally speaking seed funding is used to build the product or platform and launch initial releases.
Later Stage and VC Funding
Venture capital groups tend to invest in later stage companies. And therefore companies looking for funds from VC firms and for their series A or later rounds, are held to a higher expectation of customer proof. These companies are in effect proving that they are a safer bet because not only do they have a good idea and strategy, but they have already started executing on it and they have the real, hard customer numbers to prove it.
Other Tips on Traction
Always Truthful and Accurate
This is sort of a no brainer. You are looking for an investor to join your mentorship team to offer their time, effort, attention and investment in your business. You want them to be happy throughout working with you. Fudged or misleading traction numbers may be tempting especially when you have limited hard data at your disposal, but it will always come back to bite you. Be truthful and upfront. Maybe you don’t have a lot of traction and that’s ok. If you’re open and honest with your potential investors, the even if they aren’t interested now, perhaps they’ll ask to stay informed as you build traction before they join your next investment round.
Never be Satisfied
Never be satisfied with your current level of traction. You need more. Spend the time it takes to gather more customer proof from ever more valid and valuable sources. If you have an idea, talk to your customer. If you know who your customers are see if you can get survey responses from at least 100 of them. If you have an MVP, see if you can get Beta signups, or even Pre-Beta Signups. If you have a product, get out there are and get some initial customers. There is no excuse for not having the right customer validation information in your next pitch deck.