Traction Is Validation You Don’t Control

If you’re going to raise money from professional investors you’re going to hear one word a lot: traction. Many founders think traction is the same thing as any forward progress, but it is a very specific kind of progress most founders misunderstand.

Why Traction Matters to Investors

To investors, traction is external validation that your startup’s product or service solves a market need that people will pay for. It is not a great idea with a big market, a soon-to-be-ready MVP, a patent filing, features shipped, a visually attractive pitch deck, or anything else the startup can do or make in isolation. It has to come from outside the company and validate something the company is providing. Founders who figure out how to build traction—even through initial means very different from their eventual primary source of revenue—can dispel investor disbelief and pave a path towards funding.

What Investors Are Looking for as Early Stage Traction

Professional investors are financially motivated. The primary reason they invest in startups is their belief in the potential for substantial returns on their capital. Because of this, they look for startups that provide a product which there is a lot of market demand for and that are showing the early signals of capturing that demand.

Market demand alone is not enough. Sure, billions of people pay for and watch streaming content every day. Does that mean there is market demand for streaming content? For sure there is. Does that mean there is demand for your streaming content product? If you have no customers, no. Founders often focus on market potential and how their product could theoretically—if funded into existence—capture it, but investors want to see signals they already are. Those signals are called traction. Revenue is the most obvious (and usually most compelling) source of traction, but there are many others.

It often seems unfair, like a “chicken or the egg” scenario. Investors want to see your startup meeting market demand, but in order to do so you need a product, building a product costs money, which is what you’re asking investors for, but they want to see you meeting market demand. How can we break the deadlock? How does an early startup “build traction”? Here’s two approaches: scrappy proof, or a serious enough promise.

Scrappy proof: can you bring something to market cheaply, with your own resources, that delivers a small but meaningful part of the overall demand you’re trying to meet? Use off-the-shelf tools to deliver the solution in an unscalable—and likely lo-fi—way that still makes customers happy even if you have to be the “wizard behind the curtain”. Draw a through-line back from your future visionary product, which delivers full value, to its essential components along the way. Identify if you can deliver one of these components cheaply. An example:

Say your vision is a software suite that helps small businesses increase profits by optimizing their floor layouts based on your decade of experience in customer flow analysis and retail store design. Once complete, your customers will have live customer flow visualizations, full dashboard analytics, Augmented Reality (”AR”) functionality to imagine new promotional displays, dark mode even 😎! It’s a cool product and all you need to build it is a cool… few million dollars. Why won’t any one give it to you? There are mounds of research proving store design improves profits, SMBs don’t have the time/knowledge to do it themselves or the budget to pay for a professional, your software will change all that, the opportunity is ripe!

Step back and consider that through-line: the main value you’re selling is increased profits for physical retail small businesses through layout recommendations. You believe you can do that because you know how it’s done! Do you need AR to deliver that value? Analytics beyond what the store already knows (sales)? Visualizations? Dark mode? You could just put up a simple (free) site—or email address even—where retail business owners could submit pictures of their store and receive recommendations to improve customer flow. You could deliver the recommendations yourself manually at first—probably for quite a while as you build a customer base. You could sell that door to door in a city, or through cheap ad-buying online. Dozens of customers paying you for something you can deliver on that has clear paths towards scale through automation? That’s traction.

The pitch “I am raising money to build software around a solution customers are paying for so I can scale it to many more customers” is far more compelling than “I am raising money to build a thing I think people will want once I show it to them”.

Serious promises: If self-funding a scrappy proof of concept is not possible, you need to find some other external validation that doesn’t require your fully funded product vision to be complete. Some industries or business models make it much more difficult to be scrappy with the first ‘product’, but you can still build traction by finding prospective customers that want what you will eventually provide, and build up evidence they trust you can deliver it.

These promises of demand come in a few forms, from most to least compelling are: pre-sales > letters of intent (”LOIs”) > prospective customer interviews.

Pre-sales are where customers give you money today to get the product later.

Pre-sales are great traction because it shows your idea + vision + narrative is so compelling people will pay for it before it’s ready. Kickstarter, IndieGoGo and many other platforms have emerged to help facilitate pre-sales, but you don’t have to limit yourself to just them. Whatever your industry, if you can convince future customers to pay first you’ll have a far better pitch to raise on top of—or forgo raising entirely!

Letters of Intent are promises to buy when the product and/or outcome is delivered.

These are more common in B2B kinds of business models where it is tough for a company to green-light budget on a pre-sale, but if the solution is delivered as described they’d be happy to purchase when it is ready. This is usually rooted in the claim that you can deliver what you promise in terms of value to them, not just that the product exists someday. E.g., “if I deliver you a software solution that increases sales by 10% after use, you’ll pay X for it”. LOIs usually need to be backed by signed agreements to be compelling to investors; just talking to a dozen potential customers that say “yeah I’d totally buy that if it did what you said” isn’t sufficient.

Prospective Customer Interviews are where you demonstrate you not only understand the demand in the market, but you’ve honed in on the exact needs while also developing hundreds of relationships to sell into.

These are more in depth than a simple survey of “Would you buy this great product should it exist?” They have customer development and research rigor to them. Volume is crucial as well. Positive feedback from a few dozen people isn’t enough as sales funnels typically yield single-digit percentage conversion rates—many who say they’d pay won’t. Therefore, having hundreds of leads is usually the minimum requirement, especially for consumer-oriented products.

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Working upwards through the three approaches can be a great way to get direction and figure out your best source of traction. Using the above fictional example again:

Say you’re not 100% sure you can pull off sales improvements via just pictures of store layouts. You start an ambitious customer interview process with small business owners, scheduling hundreds of meetings and recording everything you learn. In this process you learn that certain analytics not captured by point of sale systems are actually what most business owners demand to inform their store layouts.

You know just what to build to gather and display that information, but you still don’t have enough resources to build the software to capitalize on it. Instead, you convince a dozen or so stores to sign LOIs that they’d implement your solution should you be able to provide it. Maybe one in particular is really hungry for it and willing to give you partial payment (a pre-sale!) up front just to be the first to get access. Now you have a little cash in the door, 10+ LOIs and a top of funnel of hundreds of potential sales prospects once your product is ready.

The sales funnel is initiated, the use of funds clear, and a far more compelling pitch to investors is possible. You have something to put on your traction slide other than “assembled a great team” or “MVP to be ready next month”.

Many founders feel like “traction” demands are unrealistic for their venture. They struggle mapping traction building approaches to their situation (”the market is different, we’re CPG, there’s an approval cycle, large up front costs” etc.). Mission Control helps founders draw that through-line and find ways to get unblocked. We do so every week through live workshops, educational resources, software tools, pitch practices and more. If you’d like to stop hearing “traction” and start building it, apply here.

We’ve also got some free tools to help get more insight on how investors would view your startup’s progress and set up. Check out our Startup Evaluation tool to see how much you could raise from where, and our Corporate Diligence Report that ensures if investors do get interested, you’re well positioned to take the investment.