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But Can you Sell it?
Why startup traction matters & how angel investors think about it.
I’ve heard too many founders say something like “I need to raise money to test if there’s a market for my product.”
Wrong.
First, test if there’s a market for the product, then raise money if, and only if, the answer is yes.
Today, we’re talking about what traction is and why it matters to startup investors.
The Observer Express
Don’t have time to read the entire post right now? No worries, here are the main points:
Successful businesses rely on the regular sale of their product or service to grow.
Product types matter when it comes to traction - mostly software or mostly hardware products should be treated differently.
Pre-revenue metrics and post-revenue metrics look different.
Your Last Purchase
Pause for a moment and think to yourself: what was the last thing you purchased?
Why did you buy that thing?
Whether it’s something you buy on a regular basis or a one-off transaction, I’ll bet there are a few reasons, such as:
It solved a real “problem” for you (serving as either a painkiller or a vitamin).
You believed it was capable of solving that problem.
The value you gained from the purchase was (probably) higher than the price you paid.
Now, let’s think about that experience from an investor’s perspective.
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Good Business
If a company can prove that someone is willing to part with their money in exchange for the product or service their company offers, that’s a major signal.
In our example, someone’s investment just might be paying off since you made that purchase.
Every product or service is delivered by an organization responsible for delivering on a core “value proposition,” which is essentially the benefit that the product or service offers to the buyer.
To be successful, a company must repeatedly deliver a product or service that customers are willing to pay for.
That’s why sales are so important to investors.
No matter how cool a technology is, no matter how big the market is, and no matter how strong the founder’s background may be, if a company cannot sell the product then the business cannot ultimately be successful.
A Note on Product Type
The type of product or service a startup is building determines what traction metrics matter.
This point is so important that I’ll make it again: the type of product or service a startup is building determines what traction metrics matter.
Would it be realistic to expect traction for a startup developing a 3-ton chemical waste processing system to look anything like traction for a startup building an AI copywriting software designed for middle school English teachers? No - those are completely different types of products, so traction should be considered differently.
This is probably definitely a dramatic oversimplification, but I tend to think about two broad buckets of startup types: “mostly hardware” and “mostly software” solutions. Oftentimes products involve a combination of software and hardware, so this distinction is all about where the “secret sauce” lives.
Mostly Hardware Solutions are (usually) slow to spin up and test, have a high barrier to entry, and generally require significant R&D, engineering, and significant amounts of funding to commercialize.
Mostly Software Solutions can (usually) be spun up and tested relatively quickly, and tend to be low(er) barrier to entry, and rely on hyper niche focus or applications.
That said, let’s get into the two broad categories that shape traction.
Two Kinds of Startups
There are two kinds of startups: pre-revenue and post-revenue. “Traction” is all about the concept of “getting a grip” and starting to move. Following is a breakdown of how I typically see investors think about the idea of traction for each type.
1. Traction for Pre-Revenue Startups
Many investors straight-up will not invest in pre-revenue startups as a rule. While that strategy has its merits, there is a large subset of investors who actively invest in, and even prefer, pre-revenue opportunities.
Traction metrics for pre-revenue startups can look like (but are not limited to):
Nondilutive funding
Technical milestones
Usage and performance data
LOIs (Letters of Intent)
Customer pilots
Users (Monthly, Weekly, Daily, etc.)
Anything else showing “usage” or “progress” in some form or fashion
2. Traction for Post-Revenue Startups
Traction metrics for post-revenue startups include all the above, but also include (but are not limited to):
Sales
Margins
Retention & Churn
Revenue per user/customer
Customer engagement
A whole lot more
Final Thoughts
Traction de-risks an investment and provides investors confidence the product or service will be effective in delivering on the value proposition. Contextualizing the traction metrics being considered to the type and stage of the company is important, and gives investors a sense of where things actually stand so far.
What do you think?
What traction metrics do you pay the most attention to?
Weekly Observations: 3 Lessons Learned
Having a team you can trust is the actual best.👥I continue to be more and more grateful for the PitchFact team. Seeing our reports come together without my involvement has been a fantastic blessing that has allowed me to focus my time on growing and managing the business. This week in particular I found myself feeling very grateful. We delivered 4 diligence reports, but instead of spending hours researching the intricacies of the kids baseball video recording industry, I got to spend the week on business development and networking with like-minded investors and entrepreneurs at the Lions Den DFW.
Know your assets.🔍While in Dallas I got to be part of a whiteboarding session with several trusted peers in the impact investing and wealthtech world. As part of that conversation, we focused on understanding our collective “assets” and the key “opportunities” we see. I hadn’t previously been forced to verbalize what PitchFact’s core assets are, and it was pretty cool to find myself describing the real and unique value we bring to the table.
Discovery never stops.🌟This week I got to grab drinks with an angel investor who’s been using our product for over a year to hear his thoughts and understand how our work fits into his investment process. He had some fantastic insights for me, and I am very excited to “get back on the field” this quarter to continue our discovery efforts.
Weekly Links: 3 Things I Found Interesting
Thanks for reading, have a great week.
-Andrew
If you enjoyed this post, please share it with a friend, colleague, or anyone else who may benefit.
P.S. - I recently finished creating The Angel Network Toolkit: 90 Resources for Cultivating a Thriving Community of Pre-Series B Investors, and I’m sharing it with anyone who refers a friend.
How did I do this week?
About Me
I cultivate flourishing.
I'm also the CEO of PitchFact, where our mission is to cultivate flourishing specifically through efficient and collaborative early-stage diligence. I'm a proud husband, grateful father, and honest friend. My love languages include brisket, bourbon, and espresso.