“I love what you’re building and I want to invest, BUT I just need to see some more meaningful traction.” -Every VC Ever
Every entrepreneur has heard this at one point or another. I heard it all the time as a former founder myself, and I’m embarrassed to admit that I’ve used it a few times as an investor…but no more, and I’m writing this post in part to hold myself to it.
Traction has become this ubiquitous term that too many VCs use to meekly pass on companies, especially early-stage or pre-seed startups. I recently read a post about “The Current State of ‘Seed’ Investing” by Nick Chirls of Notation Capital, in which he argues that modern day “seed” funds invest more like Series A/B investors of previous generations. I agree wholeheartedly with this and like Notation, Wonder Ventures likes to be the first institutional capital in, which often means we invest in startups before there’s any meaningful traction. We do this because we think it will provide outsized risk-adjusted returns when compared to many other stages in the market.
So then what exactly do we look for when we meet true early-stage founders before they’ve achieved meaningful traction? I look for things that I’ve started categorizing as “Micro-Traction.” There are a ton of resources available for founders looking to raise capital from the traditional seed firms once they have this so-called traction, so this is a post about three key elements of micro-traction that founders can demonstrate to create funding momentum before meaningful revenue or customer growth.
(Note: This is for companies with products already in market … a future post will talk about investing in pre-product companies.)
- Show Small, but Measurable Trajectory of Growth
- Identify Customers/User Groups
- Prove Micro-Customer Acquisition
Show Small, but Measurable Trajectory of Growth
“Let’s stay in touch. I’d love to invest when you grow to $100K MRR.”
I’m guessing you’ve heard this one before. And when you did, you probably thought, “No duh! When I hit $100K MRR lots of people will want to invest.”
So how do you show traction to early-stage investors before you hit $100K MRR? Show measurable growth and a positive trajectory in an important business area (most likely revenue)….it’s OK if it’s on a small base.
For example, as explained in Mark Suster’s seminal post about investors looking to “Invest in Lines, Not Dots”, you could show an early stage investor the following trajectory:
- Meeting 1 (Jan 1): Pitch the Idea & Vision for the company
- Meeting 2 (Feb 15): Have your first 20 customers paying $50/month
- Meeting 3 (March 30): Have 100 customers paying $50/month and show a marketing channel that has led to acquiring half of those customers in the last 2 weeks.
At this point we’re talking about only $5K MRR (a lot less than $100K), but the trajectory of the three months of accelerating growth and execution shows me where your business is going and gets me excited about it. This may not be a big number by traditional “seed” investor-traction standards, but investors love to extrapolate from results. Plus, you’ve just demonstrated your ability to execute across three months of interactions with the investor.
Identify Your First Users/Customer Groups
“Your product looks great! Let’s talk again when I can see 12 months of customer data and a cohort analysis of churn”
Thing is, you haven’t even been in business for 12 months! You only launched a beta of your product three months ago, so “seed” investors are basically saying they won’t even consider your business for investment for another nine months. How do you show where your revenue is coming from and who your customers are without large numbers and months of data?
As an early-stage investor, I am less concerned with the scale of these numbers, but rather that you can prove that you’ve identified a prototypical customer and you know where to find more of them. One way for me to understand the organic fit of these customers is to become one myself. In an ideal early-stage scenario, an investor can use your product while getting to know you.
If your product is for a specific customer who is not the investor, then push the investor to think of a friend, contact or, even better, a portfolio company that can use the product instead. Either way, be generous in giving free and easy access to your service and showing how valuable it is. And if they’re sharing it with others, this doubles as great business development for your company by getting intros to the investor’s contacts. There’s really no reason to be stingy.
Prove Micro-Customer Acquisition
“It seems like your customers really love your product. Can I see the last $100k of marketing spend broken down by channel?”
$100K? You haven’t even raised $100K of funding yet, much less spent $100K in marketing. Many “seed” or Series A investors will ask to review your marketing spend over a couple of months, looking for statistically significant proof that you have already begun spending the $$ to acquire customers at scale.
So, how do you prove your command of customer acquisition to early-stage investors? The key is to prove at least one (ideally two) channels at a small scale. Find ones you can test for a modest amount of money (say $500) to obtain specific metrics on acquisitions costs, conversions, and most importantly, the scalability of the channel.
For example, Google Search Ads are often one of the best ways to show micro-customer acquisition, as Google provides you with the tools to spend small dollars, clearly track performance and get a decent feel for the scale of potential leads they can provide.
One note, I often hear founders tell me their acquisition strategy will be driven by free channels, such as, BizDev, Partnerships, Advisors, SEO, Content Marketing or PR. Heads up, these are examples of the types of answers that usually don’t stand up to the test. Because they are free, every startup is going after them and you can’t buy scale.
If you’re going to mention the above strategies, you would not only have to show me a detailed plan for execution, but also make me believe you have a unique competitive advantage to be able acquire customers via these very unpredictable means.
If your company can clearly enumerate the 3 key elements of micro-traction, but lack, say $100k in MRR or 12 months of customer data, then traditional Series A and modern “seed” funds may continue to pass on your company. Because let’s face it, they are risk-adverse and not truly early-stage investors.
But showing micro-traction will definitely be useful in pitching your business to Wonder Ventures and other similar early-stage firms. You can hold me to that.
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This was originally published on Medium.