“Traction,” in the world of startups, is your finger on the pulse to indicate whether what you are doing is working or not working. Call them key performance indicators (KPIs), metrics, or “traction.”
Throughout your company’s life, the metric that matters to your startup is going to vary a lot. If you end up exiting through a stock listing (such as a direct listing or an IPO), one of the primary metrics you’ll be judged on is the company’s share price and the number of shares in the calculation—together expressed as the company’s market capitalization (or “market cap”). Don’t be fooled into thinking that metrics are only necessary for the later stages of your entrepreneurial journey. Most successful startups start tracking metrics from day one—and the development of those metrics is a crucial part of your pitch to investors.
Revenue is king
As far as metrics go, revenue is king. A startup that is generating a large amount of recurring revenue can raise money at any time, as long as they have a good story for how they are going to spend the invested capital to grow revenue further. However, if your company were throwing off huge bags of cash every month, you probably wouldn’t be reading this book. The obvious truth is that for a lot of startups, you’re not going to be generating revenue quite yet—but metrics are no less important!
I’ve seen many startup founders use subjective measures, such as “product in beta” or “improved onboarding” as indicators of traction. Think about this from your investor’s point of view; if there are no objective data indicating how you are doing, how can they measure how well the company is doing?
Remember also that investors rarely invest in a single data point but on trends. If your 3-month-old company has 900 customers, that’s impressive, but what is even more impressive is seeing how those customers have accumulated over time.
Be aware of so-called vanity metrics. These are objective metrics that can show progress in your company, but that doesn’t matter in the long run. The number of Twitter followers, number of people on your mailing list, and number of inbound inquiries are all critical metrics for the running of the business, of course. Still, your investor isn’t going to care. Why? You can buy Twitter followers cheaply, you don’t know the value of each of the people who subscribed to your mailing list, and it’s unclear whether those inbound inquiries are going to convert into sales.
Track early, track often
There are a few metrics you should start tracking right away. Keep an eye on your cost of acquisition (CAC); this is a dollar value that explains how much money you had to spend on advertising to acquire a customer. Of course, this varies by channel. Your content marketing and public relations may turn out to be extremely cheap ways of acquiring customers, but it’s hard to scale those channels by pouring more money into them. Your advertising channels (Facebook, YouTube, AdWords, eBay, Amazon, Twitter, etc.) are more expensive, but are more scalable: if a channel is proving to be successful, add more money to the budget to make more sales there. Some channels are hard to attribute (word of mouth, print, radio, or podcast advertising), but what you can know is how much money you are spending in total and how many new customers you attract. This total number of customers divided by cost is your “blended customer acquisition cost”—or blended CAC.
Your traction slide is an opportunity to show real, measurable progress in the history of the startup. Image Source: ruslan_khismatov/stock.adobe.com
If you run a subscription-based business, your LTV can be complicated; you don’t know how long your customer will be a customer. You’ll have to make assumptions on this front—and be prepared to able to explain and defend those assumptions. If you are Netflix, your customers may stay around for 4 years, on average, paying $14.99 per month. That means that the LTV of a Netflix customer is $720 or so.
If you don’t have “hard” traction, it’s still worth including a traction slide. Show what you’ve accomplished and when. Figure 10-1 shows what that could look like. In most B2C companies, 30 paying customers are nothing to shout about, but this slide lays the groundwork for telling a story of growth and ambition.
As a business, you’ll want your lifetime value to go up. You’ll want your cost of acquisition to go down. And, of course, you’ll need your overall number of customers to grow. If you can express both your CAC and your LTV, then you can get to a ratio between the two. The benchmark here is a 3:1—in other words, you make 3x more money off a customer than it costs to acquire them. If you can do better than that, print it big on your slides—it is a great way to tell the story of your growth on your traction slide.
If you don’t know what your lifetime value of a customer is going to be, there are other metrics you can use to show how your company is growing. Monthly active users (i.e., how many people are actively engaging with your app regularly) is a helpful metric to express how “sticky” your product is. Average time spent in app can indicate how much people care about your product. A net promoter score (NPS) can be an indication of how happy your customers are with the product.
To calculate your NPS, there’s plenty of calculators online, but in short, you’ve probably seen the question, “Would you recommend this to a friend?” The answers are fed into an algorithm of detractors (people who voted 0-6), promoters (9s and 10s). The percentage of your promoters less the percentage of your detractors is your net promoter score. Your NPS can range from minus 100 to positive 100—so a NPS of 60 is much better than it might look.
If you are pre-launch, you may not have meaningful metrics to share, which is a shame. You’ll have no ammunition to deploy to convince your would-be investors that what you’re working on is gaining traction. If that describes your situation, you may end up with metrics that are less objective and, instead, express your traction as “milestones to date.” Most of these metrics will be subjective, but if that’s all you have, then use that. The best way to express this is as a timeline: What were the milestones you reached so far? Did you do user testing? Hire staff? Raise money? Incorporate the company? Run minimum viable product (MVP) experiments? List the milestones that you think will facilitate illuminating conversations between you and the investors. Ensure that you’re showing off what you’ve been working on. Use your milestones slide as an opportunity to illustrate how you and your co-founders work together and how you built the earliest, faltering steps of your company.
What are the MVPs?
Another approach to traction is to pre-emptively consider what the most significant assumptions are in your business. Say, for example, that you are developing a smart golf ball that can help players become better golfers. How do you know that people want this? You could spend a fortune developing the product, but the more fundamental question is “does anyone want this?” There are creative ways of testing this, and this is known as an “MVP”—or a minimum viable product. The terminology here is terrible; what you are building is neither a product nor is it viable as a product. Think of an MVP as the smallest amount of resources you can commit to getting the answer to something important about your company.
MVPs can take any shape. They could be a video, a survey, a mock landing page on a website, or a quick product experiment. The goal isn’t to build something long-lasting; it’s merely an experiment that can help your project fail as quickly as possible. It may sound strange that you want to fail, but trust me, failing fast is the best thing you can do. The worst thing that happens to startups is that they spend years in research and development and end up launching a product that nobody wants or where it turns out that only 20% of the product is useful to your target audience. It would be much better to find out early that what you’re building doesn’t make sense—that’s where MVPs come in.
For example, you could create a website where people can buy these balls and create an advertising campaign driving people to this page—even if you don’t yet have the balls in stock. This is all about customer research—so use this opportunity to test price points, messaging, feature sets, or even the colors of the balls. You will find out what your initial customer acquisition cost is, and you can send a survey to your customers. When they make it to the checkout page, you have your answer: yes, somebody was willing to pay for this product. How you design your experiment depends on exactly what question you want answering, but these types of tests can go a long way toward telling the story of why someone should invest in your product. If the top reason that someone won’t invest in your startup is that they doubt anybody wants your product, you have now proven otherwise. It may be weird to think of MVP experiments as “traction,” but that’s what it is. It shows that your founding team can think strategically and critically about how to approach a market. Getting answers to fundamental questions about your business is extremely valuable.
Before you have “real” metrics, you’re asking investors to “invest in the dream.” There is nothing yet indicating that what you’re doing is going to work. In my experience, this is often one of the main reasons that investors turn down early-stage companies. “Come back when you can show some traction” is a ubiquitous rejection note. If you’re unable to raise money for your company at this stage, it may be time to take another approach. By any means possible, find a traction metric that you can start building, and focus your attention on moving that metric in the right direction. Tracking metrics will do your fundraising story a world of good. It will help keep your company scrappy and hungry while you’re trying to build early versions of your product and find early indicators of product/market fit.