- February 14, 2017
- Posted by: adminplanthy
- Category: Business plans, Funding, Others
We often equate traction with revenue or customers but the reality is that traction means different things for different stages of startup:
- Proof of Concept – Proof that the problem is genuine. People nod their heads at the problem you are tackling.
- Proof of Principle – a few early adopters are buying into your solution (this could be customers or end users, depending on the nature of your product or service)
- Market Validation – a growing awareness of your solution
- Market Adoption – your solution is now pervasively being applied, copycats are emerging
The time when startups worry about traction most is fundraising. Traction is one of the key factors deciding whether a startup will be able to raise funds or not and if yes, how much funds it will be able to raise. It gives two indications to the investors:
- That there is indeed a demand for the product or service – evidence of traction signals that people other than yourself, your team, your friends & your immediate family care about your idea.
- That the startup has achieved some momentum in fulfilling the demand – Any investor will be excited to invest in a venture which is about to reach the sharp inflexion point of a hockey-stick curve. Hockey Stick Curve starts out flat, but has a sharp inflection point when it starts quickly trending up and to the right.
Traction is highly quantitative and can be evaluated using different parameters. The key parameters that convey traction (in the order of importance) are:
- Revenue and GMV (in case of E-Commerce)
- Active users
- Registered users
- Stickiness / Repeat Sales
- Profitability – difficult to achieve early stages along with fast growth
Not all parameters are needed for all startups however 3-4 key parameters can be used creatively to convey that the startup has indeed achieved some momentum and when funded, it can really fuel the growth.
Let us take the case of E-Commerce. The recommended parameters are:
- Monthly GMV (& month-on-month growth rate)
- Average Order Value
- Gross Margin
- Repeat Sales
- Number of Customers
The rate at which traction is occurring i.e. its velocity is a key determining factor in whether you will get through the various stages of growth before competitors enter the market and whether you will be able to attract investors and ultimately a buyer for your business.
Venture capitalists have a well-trained nose for sniffing out companies that are achieving optimal traction velocity. Ideally, they look for hockey stick velocity or the propensity to achieve this.