“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.
Startup Weekends attract a wide range of participants, including innovators and inventors who may be unfamiliar with the “lean startup” approach to creating a business that SW advocates. Boston EDU Startup Weekend shared this great primer that will give you a grounding in the concepts and language you’ll see at Startup Weekend Lehigh Valley. We’ll also be sharing some definitive readings as the Weekend approaches.
Lean startup model: Eric Reis turned his blog into a recently published book, The Lean Startup, which was #2 on the New York Times Bestsellers list. (Inc. Magazine featured a condensed version of Reis’s book if you want further reading. Essentially, Reis developed a business model that encourages startups to find out as quickly as possible whether or not the business idea/product/service is viable. The path to achieving this learning is to create a rough version of your product that goes into a cycle of testing, iterating, testing, iterating, testing, and iterating until the product is viable. An important part of this process is early and frequentcustomer validation. The lean startup model came out of a concept in manufacturing where small batches are created so that there is minimal loss of time and money if the market isn’t interested in that version of the product. The same lean process works well applied to technology too. When creating a web-based tool or an app, you can create a mockup to garner feedback without building the actual product or feature, for example. (I love Balsamiq for this!)
Minimally viable product or MVP: This is not the same as a prototype! In the Lean Startup model, the goal is to create and test the smallest piece of a business to see if there’s a market for it. Reis defines the MVP as “that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort.” Essentially, you’re looking for the minimum set of features needed to learn from your early adopters because you want to learn early what users want and don’t want. It limits spending time and energy on products that no one really wants. Most teams try to develop a minimally viable product during a startup weekend, not the whole business. It looks great to judges if you’re able to validate your idea/product during the weekend. You may be asking, but how do I do that?
Customer validation or validated learning: There are a number of ways to learn about your customers and what they like and don’t like about your product/service. There’s also a big difference between what someone might say they like and what they’re willing to buy or do. The best validation is showing that customers/users will in fact want your product/service and be willing to pay for it.
You first want to see if there’s any interest. For example, if you already have a free product but are curious if people would pay for some additional features, you could add a button to your site that advertises the new version (which you haven’t built yet!). If a number of users click the button, then you have begun validating that customers are interested. If no one clicks, then all you’ve wasted is the time to develop the concept—you haven’t spent excessive money and time on something no one wants.
During a Startup Weekend, you’re likely to focus on establishing general interest in your product or service, and if you’re lucky, getting some users to act. There’s not a lot of time to build significant traction. One way to establish initial interest is to create a landing page.
Landing page: To test the viability of an idea, a single webpage is sometimes created to see if anyone will sign up for the product/service. There are several pre-built free pages out there. I’ve used and liked KickoffLabs and LaunchRock. Ooomf creates landing pages for mobile devices. What’s great about these programs is that they provide data: how many times the page was visited, how many visitors were unique, how many actually signed up. (There are some great programs with more bells and whistles for when your business grows and you need to track more complex user actions. At LessonCast (www.lessoncast.org), we use MailChimp (mailchimp.com)).
Here’s an example: I joined the team TeenStarter (TeenStarter.com) at Startup Weekend EDU in Seattle . The concept for this youth-only site was to provide both advice on creating a business (how to pitch, how to develop an idea, how to market) and to provide a platform for students to pitch their ideas to get seed funding (micro-financing for teens). Our hypothesis was that a student would post a video pitch and then use social media to send it out to his or her network. Friends of friends might also contribute, until the student received the money he or she needed to launch a business or community project.
Here are the steps we took to validate the concept that weekend:
- We created a landing page and used social media to blast to contacts of everyone on the team. (KickoffLabs showed 73 unique views and 17 users signed up.)
- Again using social media, our team sent out a request for any teenagers who had an idea to pitch. (One 13-year-old relative of a team member uploaded a video late Saturday night!)
- Once we had the site minimally functional, we posted the teenager’s video pitch and at uploaded a PayPal donate button. (Our featured teenager needed $60; $40 was raised before final pitches on Sunday night. She had the rest the next day!)
For a Startup Weekend, this exercise demonstrated a good conversion rate, and was a fairly solid proof of concept!
Conversion rate: It’s one thing to get users to your site; it’s quite another thing altogether to get them to act/buy/participate. For example, if you send out an email directing folks to a landing page, the first conversion rate will be how many viewers actually click on the link to that landing page. Then the next level of concept validation is how many of these users actually sign up. It’s possible to have more levels of increased engagement beyond this, of course. Each increased level of engagement provides more validated learning about what customers will do. In the Teenstarter example, one measure of a conversation rate would be that out of 73 people who viewed the landing page, 17 actually signed up by providing their emails.
There are other ways to validate what your customers like: interviews are often used.
Interviews: Interviews are a great way to gather information during and after a Startup Weekend. Just because you are an educator does not mean that you should assume that you know what all educators will want—still take the time to get feedback from other teachers and administrators. Other participants, organizers and mentors can help you get in contact with people outside your own educator circle. Asking educators on other teams is one good method to gather some immediate input. Showing two or three versions of a product works well to provide you with specific feedback about features.
Mockups: Remember that you do not have to create a full product to get feedback. A mockup can provide the same information with much less time investment. I learned how to use Balsamiq (free trial period!) at one Startup Weekend—it’s great for creating a design of a website or iPhone app.
Traction: Once you’ve validated your concept, you next want to build traction, something that’s unlikely to occur during a Startup Weekend because of the condensed timetable but definitely an area of focus as you move your business forward. Traction means building a set of early adopters and being able to get those adopters to do something. For example, if you’re building a community-based site, then your traction would be connected to how many users are interacting on your site. If you’re selling a product to schools, how many schools have signed? If you’re interested in investors, then they will be interested in your traction.
When you’re at Startup Weekend, learn as much as you can from other participants and mentors about other effective ways to develop your concept into a viable business!
Startup Weekend has introduced many of you to Customer Development. You’ve learned how to “get out of the building” and validate your hypotheses. You’ve been on the journey to product/market fit. Some of you have reached a clear value proposition that really addresses the needs of a specific customer segment. Congratulations!
But once you get there, do you know how to scale the reach of your offer? Do you know how to give your product the popularity it really deserves?
The authors interviewed 40 well known startup entrepreneurs – including Jimmy Wales, Alexis Ohanian and Noah Kagan to mention but a few – and analysed many more startups, to understand how their products reached traction. The results are some great insights into many different traction channels, and a very practical framework that you can apply in your own search for traction.
The book devotes 19 chapters to analysis and suggestions on as many traction channels. Some are online – from SEM and social ads to content marketing and email marketing – and some are offline – including trade shows, community building, and – yes – newspaper ads.
The most important observation the authors make is that, just based on the product you have, there is no way to tell in advance what traction channel may work for you. Because of this, the authors devised a framework that lets you consider all channels, and select a few to run some test on.
Only after some testing and measurements, can you then confidently focus all your marketing energies on the one channel that shows the most promise. Never select your channels just based on what you may think will work, or you may miss some great opportunities.
Traction is out at the end of August. I’ve had the luck to have early access to the book. I strongly believe its framework to search for traction is going to be as helpful to startups as Steve Blank’s customer development and Osterwalder’s business model canvas. I definitely advise you read it too.