The major thing to know about the first few years of funding a startup business is that in order to attract investor capital you must accomplish certain milestones.
Accomplishing milestones helps to reduce the risk associated with the startup venture.
Investors are constantly assessing risk when evaluating a startup and obviously prefer those that assume less risk. Additionally, accomplishing milestones allows you to raise capital at a much higher valuation because you’ve thereby improved the risk-to-return ration (i.e. the riskier the business the more equity the investor will need to compensate the level of risk).
There are seven main categories of milestones that most investors assess when evaluating a startup
– Business Planning
– Team Building
– Market Traction
– Product Development
– Founder Leadership
The specific milestones that you need to achieve within each categories varies depending on the type of business and the stage of capital that is being raised(startup round, seed round, series A, etc).
In this post, we’ll be focusing on the milestones that demonstrate market traction.
What is Market Traction?
According to Naval Ravikant, the Co-Founder of Angel List, market traction is simply defined as
“quantitative evidence of market demand.” Traction is proof that somebody wants your product, it communicated momentum in market adoption.
Why is Market Traction Important?
Per usual, it all boils down to risk for an investor. The more market traction you can demonstrate the less risk there is in the investment.
How Do You Demonstrate Market Traction?
Adequate market traction will vary at each round of capital simply because you have limited resources
to demonstrate it. Furthermore, one of the major reasons that you are raising capital is because you
want to grow your current traction.When raising capital from Friends, Family, and Founders in the Startup Round the amount of market traction that you can demonstrate is limited. You likely don’t have a product developed that is ready for market, so traction in the form of sales is not attainable. However, you can show potential traction by demonstrating the size of the market and trends that support your product claims and solutions.
Additionally, you can conduct primary research such as surveys and conversations with potential
customers and/or partners to help validate your value proposition. Lastly, you can put together a clear marketing plan to demonstrate how you will reach potential customers.
When raising Seed capital from Angel investors you will need to take your market traction to the next
level. This includes obtaining some Beta testers and ideally, some paying customers. You’ll need a full scale marketing plan that proves a significant market opportunity exists based on what you’ve learned about the market to date.
Ultimately, you need to prove that you understand the sales cycle for your business.
Lastly, when raising Series A capital and beyond from Venture Capitalists or institutional investors you need to show how you will scale the business. By this point, you want to deploy the capital raised in earlier rounds to not only show that there is a demand for your product but that you can scale the product. In order to demonstrate this you need to understand what it costs to acquire a new customer and what the lifetime value of that customer is.