in Education

Call us when you have traction

Editor’s note: This is a guest post by Kevin Swan (LinkedIn@kevin_swan). Kevin has cut his chops doing product management at Nexopia.com before becoming it’s CEO. He moved to the dark side with Cardinal Venture Partners and is now a Principal at iNovia Capital.   Thankfully he is an MBA dropout and that’s why we like him. Follow him on Twitter @kevin_swan or OnceABeekeeper.com. This post was originally published on January 12, 2012 on OnceABeekeeper.com.

CC-BY-NC-ND  Some rights reserved by Raymond Larose
AttributionNoncommercialNo Derivative Works Some rights reserved by Raymond Larose

This is probably one of the most common phrases you hear from venture capitalists. It has become the de facto phrase from an investor that really isn’t interested in your startup, but wants to let you down easy. I make a conscious effort to avoid taking this backdoor, but I know that I have been guilty of it as well.

Recently, I was digging into a company and providing the entrepreneur with some feedback. After sharing a few thoughts I used the traction excuse – in this case it was legit. We liked the space, the entrepreneur and what he had accomplished so far. However, he didn’t have enough traction for it to be attractive as an investment yet. He quickly emailed me back with the question – “What do you mean by traction, specifically?”

Then it hit me – I have never actually been asked that! I think that investors are so used to using the term that they never put any quantifiable information behind it. I thought that it would be a good exercise to provide a quick overview of what traction looks like. Note that what follows is completely a generalization and their are many other factors that come into play in an investment decision. Also, traction looks very different depending on the type of company you are building and the market you are targeting. I will tackle three common ones in this post and try to estimate some figures that would be required for a Series A investment.

In consumer internet or mobile startups that does not have a transactional revenue model attached to it traction is all about the audience. The bar for what traction looks like in these companies has been significantly raised from 5-7 years ago when everyone was starting social networking and digital media companies. To be compelling to a VC you will need to show early signs of growth, 30%-50%+ month-over-month (MoM), and start to build an active user base of 100K+. Some VCs I have talked to say not to get your hopes up for a Series A investment unless you are around the 1,000,000 mark.

uvs-to-pinterestLets take a look at one of the hottest companies in this space that just recently closed a round of financing, Pinterest. Don’t focus so much on the incredible growth they have recently experienced, but rather notice that they had it even when their user base was small.

SaaS company will not experience the same kind of growth as a consumer internet company. It is, however, generally able to produce revenues from day one. The definition of traction for these companies looks more at the signs (or specifically, data) that the company is moving to a scalable and profitable model. In simple terms, the separation between the cost of customer acquisition (CCA) and the lifetime value of a customer (LTV) is shrinking and repeatable. This combined with a growth of 10%-30% MoM shows signs of traction.

An e-commerce company takes a longer time to show signs of traction that is attractive to investors. This stems from the fact that it requires a considerable scale to make an e-commerce company profitable in light of low margins and expensive infrastructure. The same key performance indicators (KPIs) apply – CCA and LTV. However, unlike SaaS companies there are going to be considerable capital and fixed costs in an e-commerce company to consider. In general, growth rates of 10%-30% MoM and a 12-month run rate of over $1 million are signs that the company has traction.

I want to re-iterate that this is a generalization and their are many other factors that come into play in an investment decision. However, I wanted to try and provide some quantitative numbers for context.

Another question that I know will come up is in relation to what kind of traction is required for seed/angel investments. That is a whole other post, but I will share a great comment from my colleague Karam. While a Series A is all about traction, seed investment is all about momentum. This momentum can take a lot of forms – traffic, sales, product development, recruitment of a team or even investors who have already stepped up to the plate.

Don’t wait until you have hit these metrics to reach out to investors either. In every case, an investment starts with a relationship that has to be built and investors want to see lines not dots. If you are moving in the right the direction and building traction make sure you reach out!

Editor’s note: This is a guest post by Kevin Swan (LinkedIn@kevin_swan). Kevin has cut his chops doing product management at Nexopia.com before becoming it’s CEO. He moved to the dark side with Cardinal Venture Partners and is now a Principal at iNovia Capital.   Thankfully he is an MBA dropout and that’s why we like him. Follow him on Twitter @kevin_swan or OnceABeekeeper.com. This post was originally published on January 12, 2012 on OnceABeekeeper.com.

  • http://twitter.com/trevordoerksen Trevor Doerksen

    This is really good advice to give investors too. Call us when we get traction. Once you have traction you are likely not to have time to call investors. For the entrepreneur, it is a great thing to find time to do and doesn’t really take much time, but… where does the time go?

  • Luxojr2

    This article is pretty much as attractive as puking my guts out.  When I got traction the last thing I wanted to do was sell my valuable shares to some goof like this and have their noses in my business.   you come into the world with nothing AND YOU CANT TAKE YOUR FUCKING MONEY WITH YOU.  So get off your ass and spend it on entrepreneurs before they make it big.

  • Michael

    What a joke. VCs are useless. You talk about adding value, but if you aren’t willing to take a risk, then you’re failing at YOUR #1 KPI.

    You have no vision, and, just like politics, those who ‘play the game’ are the ones who get backed. Why don’t you try funding companies with real potential to make a difference, but whose vision takes some resources to bring to fruition?

    There’s a reason so many VC-backed companies never really make a difference in our daily lives, and why so many companies that could truly be revolutionary fail due to being undercapitalized. 90% of VCs should be ashamed of themselves for adding so little value to the world.

  • http://www.onceabeekeeper.com/ Kevin Swan

    Pretty quick with the hammer there. I think you missed my intent – to answer a question directly that entrepreneurs often ask. I’m sorry that you feel the way you do and can’t really comment directly without knowing the events that has driven you to such a strong position. The types of companies described in my post are the exact ones that need VC / investor money to scale their business.

    Getting traction in no way means the company, or entrepreneur, has made it. Almost every company with the metrics as described above will still be significantly unprofitable (some consumer internet companies with $0 revenue) and still have tons of risk to overcome and require a lot of capital before becoming “successful”.

  • http://www.onceabeekeeper.com/ Kevin Swan

    I love trying to get insightful dialog out of blog posts, but lets keep it civil and not personal. Do you even know me?

    I am not sure what “game” you are referencing. 99% of our investments start from building a relationship with the entrepreneur. It has to be transparent, genuine and have a complete alignment of interests. Entering into a relationship any other way is dangerous.

  • Paul

    In the time it took you to write this post and slam someone you’ve probably never have met, you could have added a little value to the World.

  • Paul DeJoe

    Whoa!!! What’s the website of your company?  Sounds like you got a gold mine on your hands.  

  • Justbefriends

    Just wanted to weigh in on this..I am a fairly new entrepreneur (in tech) although not a background in tech. I have heard the statement “you need more traction”. At first my thought was the same, give me more specifics, metrics…we are after all in tech/business and the numbers do matter, so BE more specific. I have heard on several occasions that the key to fundraising or finding the proper investor is like dating. Many VC’s I follow (blog and otherwise) can make it seem more like an arranged marriage than dating…If we use this analogy of “dating” for a minute… in my dating life I have had a say what I was looking for etc. and he would also have his equal say. You two come with your qualities, sometimes it works, sometimes it doesn’t…such is life. I often say to my single friends, if he doesn’t match what you are looking for, his is just not the one for you and there is one that will come but will be WAY better! So to the angry guys below, let it go, get on with it, you just haven’t might the right one. Take a deep breath. Maybe the VC’s you have met thus far are just not your type. There are other ways. Other places. Trust me I wish VC’s were more interested in the vision, passion and possibility of the company (they may really like all those things but…they just don’t want to take you home to meet their mom…at least not yet). They need to be very sure, your the ONE. Once you are in the position, you should also be sure they are the one. Because once they find you, you have to share…everything…gone are the days of lying around by yourself, now you have to share your bathroom and answer questions like “what are you thinking?”How do you feel about this? Where do see this going?:)! They muck up your life, yes they may make it far more comfortable and you may really like them but… Like dating, the very handsome guy could be just that… handsome and not smart, funny or even very nice, ugh…the VC may have lots of money to offer you when you are ready but be sure of what you are even asking for, money is not the only criteria, just like someone’s attractiveness…Don’t take it personal.  Stay the course on what you are building and why you are building it, the money will come just like future dates, when one doesn’t work it has saved you the time for a much better fit. Hope this lightened up the debate a bit:)

  • bernsstories

    I’m quite surprised at the nasty comments here. Anyone who thinks rationally about investing will understand why VC need some traction. The best I can guess is that these commentators are expecting VC to see investing like pulling the leaver of a slot machine.

    VC investing is not: angel funds, governments grants or gambling. I suppose if you wite a post that PE funds require actual profits you would get even stronger comments.

    Very informative post that actually gave me a better understanding (in general terms) of what a VC looks for when considering an investments in an unprofitable venture.

  • Startupfounder

    I agree with the spirit of this post, I think it makes sense. However, there really needs to be a follow up article from the other side directed to the VC firms from successful startups – “you should have called before we hit it big.” When the associates starting calling you, then you know you don’t need VC money.

  • Johnm4douglas

    Wow! Quite some rude comments. I do think that the language should be tempered but the abrasive tone of the comments should be kept.

    Most Canadian VC’s are short-sighted. No problem. There are others out there willing and able.

    Plus new advanced technology is on its way and it will wipe them out. The grinding of teeth is coming.
    Watch how it unfolds…

  • Luxojr2

    I am certainly not sorry I feel that way.  And yes, the hammer is deserved in this case.  Its very simple.  The future value of injected capital is asymptotically related to the risk of default and to be clear that relationship is quite sharp.  When I don’t have traction your million is worth 50% of my company.  When I do have traction, your million is worth 0.001% of common shares.
    I outright challenge you to write a follow up post on this issue and back the risk adjusted value of the VC dollar and the relationship between it and traction.

  • Luxojr2

    straight up..  the relationship between risk and capital is asymptotic and goes exponentially to 0 with proof of future value.   I want to see a defense of the value of the dollar invested related to points of traction and profitability in a company lifetime.   Any accountant or financial analyst knows this but most entrepreneurs do not and VC totally take advantage.  Kevin will show his quality when he writes this post and defends his position.

  • Rob G

    Wow, I am shocked by the vitriol and anger in some of these responses, especially if anyone has actually been through the process before. The purpose of this post was to de-mystify the answer to a question that faces every entrepreneur seeking their first institutional/VC round – how is your product doing. This was not answered from the perspective of an angel or seed investment, which is where traction is less important than vision and team.  I’m also not sure why someone might think that VCs aren’t backing “real” companies, given that we all use products from VC backed companies each and every day. As an entrepreneur, and having met with and pitched to many VCs over the years, I certainly understand the frustration where it feels like a VC doesn’t “get” the value in your company or your vision, and there are few companies that hit home runs out of the gate, so the investment process feels unfair when you’re emotionally invested in your product (as you should be). But the reality is that there are different types of investors at different stages, and finding the right fit is critical. Yes, sometimes good companies don’t get funded. Yes, sometimes promising companies fail to make it to the next stage for sometimes seemingly arbitrary reasons. But at the end of the day VCs have their investors that they must answer to, and knowing that 8/10 investments are not going to be major successes, it’s clear that VCs are taking risks. Adding value is another question, and that’s where it’s important that the entrepreneur pick their investors as much as the other way around. There are certainly investors out there that don’t add value beyond their money. Pick wisely.

  • Pingback: Getting Traction or Time to Apply the Tire Chains? « LaunchPad's Ready-Aim-Fire()

  • http://www.onceabeekeeper.com/ Kevin Swan

    That is why you rarely see accountants or financial analysts in startups. :-)

    Seriously though, traction described above is NOT proof of future value.  It does warrant a higher value, and hence, why the valuation of your company will increase, but it by no means is proof of a profitable nor sustainable business model.

  • Luxojr2

    I disagree.   If Amazon can calculate the future value of a customer why can’t a startup?  Its just a matter of being sophisticated enough to walk through a data driven argument and calculate the probability of return.

    I was wrong to be so angry, but man this kind of post just drives me insane and I f’d up by talking out of line.  The real issue is the value of capital at various stages of the firms data driven momentum and VC seem to never state the value publicly because they know they can play the game with starry eyed founders to extract a higher delta on the term sheet.  Its just the whole arena of distrust that causes the vitriol and frustration from founders.  

    The rationalization so many founders make is that it is easier to forgo VC and just concentrate on growing revenue until you either reach overwhelming leverage or bust.  but I think if no large outright risk is taken (like Colour), then Canadian startup growth is going to be a sad case compared to our friends down south.

  • Luxojr2

    Rob I am not sure your math makes common sense.   if you invest 10 investments at stages that Kevin is stating above, it seems that 8 out of 10 flops with 0 return and 0 cashflow is a bit egregious.  how is it risky if you break even 8 out of 10 and tranche the investment to hedge against risk and then get 2 homers and laugh your way to the bank.

    I’m pretty sure most VC do not drive Toyotas, unless they are just downright cool.  the point I make here is that VC are actually not in the business of risk at all and are no better then a bank.   why then do we have to give up 30% of our company?   Why not treat all VC as a loan at 3.4% interest?  What is the rationale?

    Its just easier to take your company and forget going big and concentrate on revenue streams and leverage.  This is not good for creating massive jobs and opportunity in Canada.  take it with a grain of salt.

  • Neil B

    “before becoming it’s CEO”?! Let’s hope the editor spots this when they return from vacation.

    Interesting article, and interesting responses from bitter people.

    I’m not sure what the difficulty is in having sympathy for VCs- they caretake chunks of money that need to generate further chunks of money. The definition of the success of an investment is also very personal. There are VCs who specialise in lower risks for lower returns and the converse. It’s pretty transparent what they do and what their motivation is.

    The bottom line is- if you’re going to be “successful” for some definition of the word, you will succeed in getting some VC money. If your business plan requires huge upfront investment and you believe you’re communicating clearly, yet no investment is forthcoming, then you should probably be thinking “Hm, the VC won’t risk their money, so why am I risking my money/effort?”.

  • http://twitter.com/steve_messina Steve Messina

    There is often a huge discontinuity between the mental model of the business between investors and makers, so after mentoring a few startups, I’m currently founding a self-bootstrapped startup to try address this value issue of early startups.
    I’m looking at modeling/bounding the intangibles to be able to present a stronger, rationalized case of future value to VC’s / Investors – and vice versa – for entrepreneurs to cover all the future bases of what the business plan needs.Thus entrepreneurs will have a clearer, justified case as to the pre-valuation of their idea, and investors will be able to do due diligence to see what assumptions are made and how statistically significant their impact is.Later on, I will include modeling what-if scenario’s of the impact of potential term sheets.Will get a private beta out in the next couple of months at startupengines.com

    All the best,
    Steve

  • Andrew Draper

    This is actually a great article, there seems to be 2 key things the haters in the comments seem to be missing,

    1. The article specifically talks about traction as it relates to a series A – and there are very few of us ready for that (particularly in Canada – suck it up, it’s the truth).

    2. The real gold for most entrepreneurs is probably the last bit about “momentum” – I’d love to see a second article specific that.

    Also to the haters, stop thinking what your doing is worth anything, it’s not (at least not until it is). Too many people, especially in the current startup environment, think what they’re doing is the best thing since sliced bread, I hate to say it but it’s probably not…yet…and worst of all, the idea that your showing momentum on is probably not the idea that will gain traction, deal with it.

    When I was raising the seed round for the last company I co-founded I used to say “we need to be the beggar outside the grocery store, not the beggar in front of the liquor store” – be smart about it, know exactly why you need the money you’re asking for and ask lots of questions and gain insight, there’s a nugget in every meeting, even when it ends with “call us when you have some traction”.

    You’re going to be so bipolar and so ready to throw in the towel during this whole process that you need to pull as much positivity out of every interaction you can, otherwise you’ll fail. Period.

    I’m about to start the whole process again with my new company. Am I looking forward to it? Not even a little bit, but I know I’m going to build it with or without funding so it doesn’t matter and that if I can get a couple hundred thousand dollars of seed money I can really blow shit up – it might not be exactly what I’m working on now, but it’ll be related and it’s going to be huge.

    Haters are going to hate.