{"id":18330,"date":"2019-02-19T13:47:07","date_gmt":"2019-02-19T13:47:07","guid":{"rendered":"https:\/\/seedlegals.com\/resources\/growth-growth-and-traction-for-fundraising\/"},"modified":"2019-02-19T13:47:07","modified_gmt":"2019-02-19T13:47:07","slug":"growth-growth-and-traction-for-fundraising","status":"publish","type":"post","link":"https:\/\/seedlegals.com\/ie\/resources\/growth-growth-and-traction-for-fundraising\/","title":{"rendered":"How to Show Growth and Traction for Fundraising"},"content":{"rendered":"<p><em>Seedcamp Partner,\u00a0<\/em><a href=\"https:\/\/twitter.com\/cee\" data-rt-link-type=\"external\"><em>Carlos Espinal<\/em><\/a><em>, has written this piece focusing on how to show growth and traction for early-stage startups looking for investment, with key contributions from our Experts in Residence\u00a0<\/em><a href=\"https:\/\/twitter.com\/scott_sage\" data-rt-link-type=\"external\"><em>Scott Sage<\/em><\/a><em>\u00a0and\u00a0<\/em><a href=\"https:\/\/twitter.com\/KeithWallington\" data-rt-link-type=\"external\"><em>Keith Wallington<\/em><\/a><em>, and\u00a0<\/em><a href=\"https:\/\/twitter.com\/jeffseedrs\" data-rt-link-type=\"external\"><em>Jeff Lynn<\/em><\/a><em>. Seedcamp is Europe&#8217;s seed fund, identifying and investing early in world-class founders attacking large, global markets and solving real problems using technology. If you&#8217;re looking for funding, submit your details via their website at <\/em><a href=\"http:\/\/bit.ly\/SeedcampSL\" target=\"_blank\" rel=\"noopener noreferrer\" data-rt-link-type=\"external\"><em>Seedcamp.com.<\/em><\/a><\/p>\n<p>&#8211;<\/p>\n<p>As an early-stage startup trying to fundraise, you\u2019ll likely have to tell a version of your company\u2019s story that demonstrates high likelihood of growth to attract an investor. Which are the stories that are most commonly used during the early stages of a business, and which ones later on?<\/p>\n<p>In this post, we\u2019ll cover the various forms of \u2018validation &amp; traction\u2019 that you can potentially leverage in conversations with potential future investors as well as to create internal benchmarks for you and your team.<\/p>\n<p>If we look back at this topic as a form of storytelling, below are the \u2019stories\u2019 I hear the most (alone or multiple at once):<\/p>\n<ul>\n<li>Look at my amazing team \u2013 effectively, whilst we haven\u2019t yet produced anything, we have gathered experts that will likely generate something great.<\/li>\n<li>Look at my amazing product in an amazing market \u2013 the traditional point of fundraising, where you\u2019ve identified a meaningful enough market and have embarked on creating a product and are fundraising to hit product-market-fit.<\/li>\n<li>Look at my amazing investors (past, or about to invest, and are committed in the round).<\/li>\n<li>Look at my amazing growth (non-monetized) \u2013 typical of social networks.<\/li>\n<li>Look at my amazing growth (monetized) \u2013 pretty much every other type of business that isn\u2019t included in #4 above.<\/li>\n<\/ul>\n<p>In previous blog posts, I\u2019ve covered what makes an amazing team and how\u00a0<a href=\"http:\/\/thedrawingboard.me\/2011\/09\/12\/how-does-an-investor-evaluate-a-startups-team\/\" data-rt-link-type=\"external\">investors evaluate a team<\/a>, what Tier an investor is in and how other investors might judge who is in your round. In this one, I want to focus on 4 and 5 of the list above. Basically, understanding when you have any kind of traction and what constitutes \u2018impressive\u2019 for the average investor.<\/p>\n<p>One way of trying to benchmark what is \u2018impressive\u2019 is by looking at some companies that are generally considered to have done extremely well.\u00a0In this Quora\u00a0<a href=\"http:\/\/www.quora.com\/What-is-a-typical-user-growth-rate-for-a-hot-web-start-up-the-first-year\" data-rt-link-type=\"external\">post<\/a>, we can see a few of the companies often referred to as \u2018impressive\u2019:<\/p>\n<p><strong>Weekly\u00a0Revenue\u00a0Growth<\/strong><\/p>\n<ul>\n<li>AirBnB:\u00a017.25%<\/li>\n<li>Facebook:\u00a021.5% (for more detail check out this\u00a0<a href=\"http:\/\/www.benphoster.com\/facebook-user-growth-chart-2004-2010\/\" data-rt-link-type=\"external\">post<\/a>)<\/li>\n<li>Groupon:\u00a025.1%<\/li>\n<\/ul>\n<p>However, as impressive as they are, these numbers don\u2019t show the entire story. They hide various operational and industry dynamics that are only possible in the sectors in which those companies operate. For example,\u00a0the\u00a0<a href=\"http:\/\/thedrawingboard.me\/2013\/07\/15\/whats-your-real-customer-acquisition-cost\/\" data-rt-link-type=\"external\">cost of acquisition<\/a>\u00a0and the sales cycle for each of these businesses might be drastically different than yours. Looking at these figures as a 1:1 to what you have to achieve might create an insecurity complex and frustrating unit economics. Effectively, you can\u2019t compare oranges with apples. They\u2019re impressive for sure, but are they applicable to your company and is it realistic for you to sustain those kinds of numbers in the long term?<\/p>\n<p>Whilst the above point might seem self-evident for extreme cases, I\u2019m always surprised by what I hear some founders receive as feedback from investors when being compared to idealized growth cases.<\/p>\n<p>Let\u2019s kick things off with the easiest form of growth to talk about, user-growth in any kind of network effect business where monetization is not the immediate short-term goal. The most typical example will be social networks.<\/p>\n<p>These kinds of companies are the ones that are the most referenced to when looking for ridiculous growth rates. Facebook and Twitter in their early days are good examples. However, before we get into what kind of week-on-week growth is impressive, let\u2019s tackle one very big point that makes any growth meaningful.<\/p>\n<p>If the business\u2019s successful growth allows it to have lock-in effect, then a non-monetized growth strategy early-on makes sense as a way to monopolize the customer-base and once locked-in, monetization strategies can be considered without fearing user-growth-rate loss and churn to competitors and\/or substitutes.<\/p>\n<p>Not all businesses that embark on a non-monetized high user-growth rate strategy truly have lock-in capabilities so it is not unusual to have these be the ones most investors are less interested in. If there is any risk that you might fall into this category, start thinking about what could make your user-growth rate create a lock-in that no competitor could make you lose.<\/p>\n<p>For these kinds of businesses where user growth rates are what is\u00a0being used as a proxy for future revenue, a 6-10% week-on-week growth rate will be considered as impressive. Above 10% week-on-week would be considered as boss-level growth, as can be seen from Facebook or other companies mentioned in the Quora post above. Only a few companies frequently achieve these levels. Other impressive growth rates from companies falling into this category can be seen\u00a0<a href=\"http:\/\/techcrunch.com\/2014\/11\/25\/tumblr-overtakes-instagram-as-fastest-growing-social-platform-snapchat-is-the-fastest-growing-app\/\" data-rt-link-type=\"external\">here<\/a>.<\/p>\n<p>Once a company decides it needs to be charging early-on because its product doesn\u2019t have a network effect built-in (or where there are plenty of substitutes in their market), one can expect the company to be measured by a different set of growth rate standards. Although there are always exceptions, once money is involved, things get more complicated.<\/p>\n<p>There are several factors that can generate a different set of growth rates, with the main ones being:<\/p>\n<ul>\n<li>Sales cycles<\/li>\n<li>Marketplace balancing<\/li>\n<li>Operational capacity building<\/li>\n<\/ul>\n<figure class=\"w-richtext-figure-type-image w-richtext-align-fullwidth\" data-rt-type=\"image\" data-rt-align=\"fullwidth\">\n<div><img decoding=\"async\" src=\"https:\/\/daks2k3a4ib2z.cloudfront.net\/5a4d09f22b69220001d89be6\/5a53a7a802eb7600018d66e8_Operational%20building.png\" \/><\/div>\n<\/figure>\n<p>Sales cycles can vary greatly from business-to-business and can serve as a proxy for sales growth until you actually materialize sales.\u00a0If you want a quick brief on sales cycles, this\u00a0<a href=\"http:\/\/yourbusiness.azcentral.com\/types-sales-cycles-13134.html\" data-rt-link-type=\"external\">link<\/a>\u00a0will walk you through the basics.<\/p>\n<p>Comparing growth rates of monetized companies becomes complicated because not all of them have the same sales cycles. We\u2019re back to our orange to apple comparison dilemma. Some might have a heftier cost of customer acquisition but can sell immediately (such as software download), while others might require a subscription once someone deems the relationship with the service worthwhile (such as dating sites) but might be able to leverage virality effects intrinsic to their sector or customers\u2019 needs\/desires to lower their cost of acquisition. Life isn\u2019t fair, but let\u2019s try and see how we can compare businesses in these categories.<\/p>\n<p>Let\u2019s first start by looking at companies that have a long sales cycle. These companies might have interactions with their customers via newsletters, social media, click-throughs etc. but can have frustratingly low month-on-month growth rates on conversion.\u00a0For those, a good starting point as a proxy for growth is to have engaging discussions really early on about the value you bring to your customers so you can use it as a proxy to the actual (and hopefully, eventual) conversion point. Try and find correlations between behavior and interactions with your product as a precursor to conversion between marketing initiatives (content marketing reads, etc.). This isn\u2019t easy or pretty, but having nothing to speak about on why your early customer might care is likely unacceptable. This also helps to think about what kind of \u2018features\u2019 you can build into your product that can signal the intent of conversion in the future. For example, does adding things into a wish list you\u2019ve created for customers increase conversion once key dates in the year come around (holidays or birthday).<\/p>\n<p>As a software company, you should not get caught in the sales funnel trap. Too many startups equate growth to how many deal leads are being added to the sales funnel every week. Adding X% new business to your pipeline every week is great, but if the output \u2014 closed deals \u2014 is close to nil and not growing, you have a serious problem. If you and your team are able to convert your top of the funnel demand into an efficient sales process and close deals, well done. But if you\u2019re like most startups, you will have inexperienced people\u00a0adding every possible deal lead in the world into the sales pipeline without knowing 1) how to qualify those deals or 2) whether they even fit what a typical buyer looks like.<\/p>\n<p>So, how should we think about traction from the standpoint of a software startup and their sales cycle? One important note to make is that the range of pricing varies greatly. A startup selling $100k enterprise deals will have a longer and more complicated sales cycle than\u00a0a\u00a0startup selling a $5k deal that may not require the board\u2019s or your CFO\u2019s sign-off. Investors want to see consistency in your sales execution. If you were able to close nine deals in the first quarter of focusing on sales, then they will want to see at least nine deals in the next quarter. The more deals your team closes, the better they get at qualifying opportunities, pushing the sale through, and understanding where various customers receive the most value from your product. Once you have a good idea of what your sales cycle looks like, then you should be able to shorten the cycle and in theory, close more deals faster with the same team.<\/p>\n<p>At a high level for SaaS businesses, investors want to see an absolute minimum of 100% growth year-over-year. Assuming your sales and marketing team and costs stay the same from one year to the next, investors will expect you to retain a very high proportion of customers from the first year (let\u2019s assume for simplicity you\u2019re able to keep 100% of the revenue from year one\u2019s customers by retaining 90% and up-sell another 10%). Then with the same team, you should be able to acquire the same number of customers with roughly the same size of contracts. So Y1\u2019s recurring bookings + Y2\u2019s new bookings = 2x Y1\u2019s first year\u2019s bookings.<\/p>\n<p>Aside from Sales Cycles, there are other limitations that can create an\u00a0artificial\u00a0restriction\u00a0on growth rates in early-stage companies, which make it unfair to compare companies like for like. Two examples include marketplace supply and demand balance, and operational limitations, which when optimized, lead to increased demand.<\/p>\n<figure class=\"w-richtext-figure-type-image w-richtext-align-fullwidth\" data-rt-type=\"image\" data-rt-align=\"fullwidth\">\n<div><img decoding=\"async\" src=\"https:\/\/daks2k3a4ib2z.cloudfront.net\/5a4d09f22b69220001d89be6\/5a53a7c3709dd1000122ed66_lead%20to%20increased%20demand.png\" \/><\/div>\n<\/figure>\n<p>Various successful marketplaces have used a number of strategies to capture a market and grow, but all share a common pattern, which was to start from the supply.<\/p>\n<p><strong>Shutterstock, Founded 2003<\/strong><\/p>\n<ul>\n<li>Started from the supply side by uploading 100,000 pictures on the website before sourcing buyers<\/li>\n<li>Opened up the platform to the contributors globally as demand was growing<\/li>\n<li>2013 \u2013 2014\u00a0year-over-year growth of 39.3% and 39%, respectively<\/li>\n<li>IPO 2013<\/li>\n<\/ul>\n<p><strong>Airbnb, Founded 2008<\/strong><\/p>\n<ul>\n<li>Started from the supply side by offering users who listed properties on Airbnb the opportunity to post on Craigslist as well<\/li>\n<li>Year-on-year supply side growth\/listing growth: +140% (2011-2012); +150% (2012-2013); +83% (2013-2014)<\/li>\n<li>Funding growth: $7,2k (2010); $112k (2011); $200k (2012); $450k (2014)<\/li>\n<\/ul>\n<p><strong>Etsy, Founded 2005<\/strong><\/p>\n<ul>\n<li>Started from the supply using an offline strategy: attracted sellers by attending arts and craft shows across the US and Canada every weekend \u2013 leveraged social movement, feminist blogger who were using craft as a rejection of mass-produced culture<\/li>\n<li>2015 IPO<\/li>\n<li>Growth metrics:<\/li>\n<\/ul>\n<figure class=\"w-richtext-figure-type-image w-richtext-align-fullwidth\" data-rt-type=\"image\" data-rt-align=\"fullwidth\">\n<div><img decoding=\"async\" src=\"https:\/\/daks2k3a4ib2z.cloudfront.net\/5a4d09f22b69220001d89be6\/5a53a92702eb7600018d67e3_Growth%20metrics.png\" \/><\/div>\n<\/figure>\n<ul>\n<li>32% of the seller who were active in 2011 are still actively selling<\/li>\n<\/ul>\n<figure class=\"w-richtext-figure-type-image w-richtext-align-fullwidth\" data-rt-type=\"image\" data-rt-align=\"fullwidth\">\n<div><img decoding=\"async\" src=\"https:\/\/daks2k3a4ib2z.cloudfront.net\/5a4d09f22b69220001d89be6\/5a53a80289b1e10001163ba3_actively%20selling.png\" \/><\/div>\n<\/figure>\n<ul>\n<li>GSM contribution per buyer type:<\/li>\n<\/ul>\n<figure class=\"w-richtext-figure-type-image w-richtext-align-fullwidth\" data-rt-type=\"image\" data-rt-align=\"fullwidth\">\n<div><img decoding=\"async\" src=\"https:\/\/daks2k3a4ib2z.cloudfront.net\/5a4d09f22b69220001d89be6\/5a53a7f9231ceb0001902b61_buyer%20type.png\" \/><\/div>\n<\/figure>\n<p><strong>Quibb, Founded 2013<\/strong><\/p>\n<ul>\n<li>Started with the supply side by having coffees with potential users for an hour each day<\/li>\n<li>Targeted startup founders and other tech people to have valuable feedback<\/li>\n<li>Spent ~100 total hours acquiring 40 initial members during a 3 to 4-week period<\/li>\n<\/ul>\n<p><strong>Key Lessons:<\/strong><\/p>\n<ul>\n<li>Grow\u00a0supply first<\/li>\n<li>Find the appropriate growth hack for your business to grow it quickly and make a market possible<\/li>\n<li>Ensure transactions take place by validating demand (product features,\u00a0build trust,\u00a0ease of use,\u00a0transparency etc.)<\/li>\n<li>Supply base can also become customers (i.e. photographer buyer and seller) =&gt; onboarding a customer on Airbnb means those customers can be hosts as well<\/li>\n<\/ul>\n<p><strong>KPIs:<\/strong><\/p>\n<ol>\n<li><strong>Gross Marketplace Volume (GMV) \/ aka Total Transaction\u00a0Value (TTV)<\/strong>: what is the total dollar amount being transacted through the marketplace?<\/li>\n<li><strong>Commission \/ take-rate:<\/strong>\u00a0should increase over time once the demand side starts growing and merchants become more reliant on the marketplace for their sales<\/li>\n<li><strong>Unit economics:<\/strong>\u00a0a granular view of revenues and costs of a single transaction<\/li>\n<li><strong>Basket size<\/strong>: value of each transaction<\/li>\n<li><strong>Repeated purchase rate<\/strong>: repeat customers<\/li>\n<li><strong>Demand\u00a0fulfillment\u00a0rate<\/strong>: what percentage of the time can your marketplace deliver on its promise to consumers? \u2013 correlated with consumer net promoter score (NPS)<\/li>\n<\/ol>\n<p><strong>What investors look for in online\u00a0marketplace businesses: growth metrics<\/strong><\/p>\n<p><strong>Supply<\/strong><\/p>\n<ul>\n<li>Double-digit growth on the supply side (product, merchants, workers) and some bookings and retention on the demand side<\/li>\n<li>How quickly you\u00a0can grow the supply<\/li>\n<li>How capital\u00a0efficient can\u00a0you grow the\u00a0supply<\/li>\n<li>Frequent site\/app visit and transactions are the best performing cohorts<\/li>\n<\/ul>\n<p><strong>Demand<\/strong><\/p>\n<ul>\n<li>Only when supply has been sufficiently grown<\/li>\n<li>Only switch to on demand when it becomes\u00a0purely organic (supply has reached critical level)<\/li>\n<li>Focus on\u00a0early adopters to kick start the demand as these are the people who\u00a0will see the value, after this it\u2019s a matter of how you\u2019ll get the early majority on board and how you create the brand<\/li>\n<\/ul>\n<p><strong>Summary Table for how to think of where your company\u2019s economic opportunities are<\/strong><\/p>\n<figure class=\"w-richtext-figure-type-image w-richtext-align-fullwidth\" data-rt-type=\"image\" data-rt-align=\"fullwidth\">\n<div><img decoding=\"async\" src=\"https:\/\/daks2k3a4ib2z.cloudfront.net\/5a4d09f22b69220001d89be6\/5a53a828598ebc00016963fd_economic%20opportunities%20are.png\" \/><\/div>\n<\/figure>\n<figure class=\"w-richtext-figure-type-image w-richtext-align-fullwidth\" data-rt-type=\"image\" data-rt-align=\"fullwidth\">\n<div><img decoding=\"async\" src=\"https:\/\/daks2k3a4ib2z.cloudfront.net\/5a4d09f22b69220001d89be6\/5a53a83c6ceffc000153fd86_operational%20opportunities%20are%202.png\" \/><\/div>\n<\/figure>\n<p>So, we\u2019ve covered quite a bit of ground on user growth rates, sales cycles, marketplaces and the like, but how about for businesses where there might need to be some stockpiling of inventory first before going out to the market, or perhaps R&amp;D and progress therein, before being able to announce\/launch a product, or how about ones that are just getting better and better in their internal processes and waiting for the next inflection point in demand to really scale up after a fund raise?<\/p>\n<p>For now, let\u2019s focus on the optimization of production costs that are already existing in order to better demonstrate your company\u2019s growth in preparation for a fundraising.<\/p>\n<p>Optimizing production costs leads to unlocking the ability to service more customers and, therefore, to grow faster. Until fully optimized, you will be limited not by user interest, but rather by operational limitations. Week-on-week or month-on-month growth could, therefore, be pegged to operational improvements.<\/p>\n<p>A number of operational blockades will need to be overcome throughout the customer journey:<\/p>\n<ul>\n<li><strong>Demand Generation<\/strong><\/li>\n<\/ul>\n<p>Can start manually going through a human collection of leads such as contact details etc. and is appropriate for early-stage customer\u00a0validation. The process must be automated or other lead sources secured to ensure marketing can deliver a growing volume of appropriate leads into the customer acquisition funnel.<\/p>\n<ul>\n<li><strong>Physical Sales<\/strong><\/li>\n<\/ul>\n<p>Might be limited by\u00a0the\u00a0number of meetings each sales person can schedule and attend in a week\/month- solution: study the sales funnel and automate where you can, improve use of CRM, evolve marketing lead qualifications and nurturing processes to deliver better-qualified leads to sales such that the customer is more progressed towards a\u00a0purchase by\u00a0the time they are handed to sales. Adding more sales people without optimizing these other pieces will likely see CAC not improving as the business grows<\/p>\n<ul>\n<li><strong>Onboarding and Support<\/strong><\/li>\n<\/ul>\n<p>Manually\u00a0onboarding and supporting customers is ok in\u00a0early customer\u00a0validation phase but must be automated to the maximum appropriate degree without destroying customer experience to avoid a bottleneck. Often an automated\u00a0onboarding and support experience (with good monitoring, alerting and access to help) can improve customer experience\u00a0as they can work at their own pace\u00a0and not need to fit\u00a0into a\u00a0schedule<\/p>\n<ul>\n<li><strong>Impact on Customer<\/strong><\/li>\n<\/ul>\n<p>Process innovation by reducing issues internally and unlocking a new rate of growth. Marketplace growth requires balanced growth and should result in week-on-week growth.<\/p>\n<p>In conclusion, there are many variables that can be used to determine a company\u2019s growth and traction \u2018by proxy\u2019. In a recent chat with Jeff Lynn, founder of Seedrs, he said \u201c<em>the appropriate unit of time to measure a business\u2019s growth varies from company to company. One of the things we\u2019ve found with Seedrs is that month-on-month growth rates aren\u2019t particularly helpful because we\u2019re too spiky in terms of monthly transaction levels. When we look at month-on-month, one month we\u2019re over the moon because we\u2019ve grown 200% over the previous month, and then the next month we\u2019re in despair because we\u2019ve shrunk by 50%. We\u2019ve now moved to measuring everything on a quarter-by-quarter basis \u2014 even that isn\u2019t perfect, and our real cadence is more like six months, but we\u2019ve had to balance that against the need to iterate and adapt quickly enough (although in our Series A fundraising materials, we should everything on a six-monthly basis, and it worked just fine).<\/em>\u201d<\/p>\n<p>Hopefully, this post has given you a new way of looking at some potential ways for you to start tracking growth in your company to create a more compelling case for future investors.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Here are the various forms of \u2018validation &#038; traction\u2019 that you can potentially leverage in conversations with potential future investors.<\/p>\n","protected":false},"author":17,"featured_media":426758,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[104],"tags":[],"event_tags":[],"class_list":["post-18330","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-funding-guides-ie"],"acf":{"hero_image":426755,"post_content":[{"acf_fc_layout":"text","text":"<p><em>Seedcamp Partner,\u00a0<\/em><a href=\"https:\/\/twitter.com\/cee\" data-rt-link-type=\"external\"><em>Carlos Espinal<\/em><\/a><em>, has written this piece focusing on how to show growth and traction for early-stage startups looking for investment, with key contributions from our Experts in Residence\u00a0<\/em><a href=\"https:\/\/twitter.com\/scott_sage\" data-rt-link-type=\"external\"><em>Scott Sage<\/em><\/a><em>\u00a0and\u00a0<\/em><a href=\"https:\/\/twitter.com\/KeithWallington\" data-rt-link-type=\"external\"><em>Keith Wallington<\/em><\/a><em>, and\u00a0<\/em><a href=\"https:\/\/twitter.com\/jeffseedrs\" data-rt-link-type=\"external\"><em>Jeff Lynn<\/em><\/a><em>. Seedcamp is Europe&#8217;s seed fund, identifying and investing early in world-class founders attacking large, global markets and solving real problems using technology. If you&#8217;re looking for funding, submit your details via their website at <\/em><a href=\"http:\/\/bit.ly\/SeedcampSL\" target=\"_blank\" rel=\"noopener noreferrer\" data-rt-link-type=\"external\"><em>Seedcamp.com.<\/em><\/a><\/p>\n<p>&#8211;<\/p>\n<p>As an early-stage startup trying to fundraise, you\u2019ll likely have to tell a version of your company\u2019s story that demonstrates high likelihood of growth to attract an investor. Which are the stories that are most commonly used during the early stages of a business, and which ones later on?<\/p>\n<p>In this post, we\u2019ll cover the various forms of \u2018validation &amp; traction\u2019 that you can potentially leverage in conversations with potential future investors as well as to create internal benchmarks for you and your team.<\/p>\n<p>If we look back at this topic as a form of storytelling, below are the \u2019stories\u2019 I hear the most (alone or multiple at once):<\/p>\n<ul>\n<li>Look at my amazing team \u2013 effectively, whilst we haven\u2019t yet produced anything, we have gathered experts that will likely generate something great.<\/li>\n<li>Look at my amazing product in an amazing market \u2013 the traditional point of fundraising, where you\u2019ve identified a meaningful enough market and have embarked on creating a product and are fundraising to hit product-market-fit.<\/li>\n<li>Look at my amazing investors (past, or about to invest, and are committed in the round).<\/li>\n<li>Look at my amazing growth (non-monetized) \u2013 typical of social networks.<\/li>\n<li>Look at my amazing growth (monetized) \u2013 pretty much every other type of business that isn\u2019t included in #4 above.<\/li>\n<\/ul>\n<p>In previous blog posts, I\u2019ve covered what makes an amazing team and how\u00a0<a href=\"http:\/\/thedrawingboard.me\/2011\/09\/12\/how-does-an-investor-evaluate-a-startups-team\/\" data-rt-link-type=\"external\">investors evaluate a team<\/a>, what Tier an investor is in and how other investors might judge who is in your round. In this one, I want to focus on 4 and 5 of the list above. Basically, understanding when you have any kind of traction and what constitutes \u2018impressive\u2019 for the average investor.<\/p>\n<p>One way of trying to benchmark what is \u2018impressive\u2019 is by looking at some companies that are generally considered to have done extremely well.\u00a0In this Quora\u00a0<a href=\"http:\/\/www.quora.com\/What-is-a-typical-user-growth-rate-for-a-hot-web-start-up-the-first-year\" data-rt-link-type=\"external\">post<\/a>, we can see a few of the companies often referred to as \u2018impressive\u2019:<\/p>\n<p><strong>Weekly\u00a0Revenue\u00a0Growth<\/strong><\/p>\n<ul>\n<li>AirBnB:\u00a017.25%<\/li>\n<li>Facebook:\u00a021.5% (for more detail check out this\u00a0<a href=\"http:\/\/www.benphoster.com\/facebook-user-growth-chart-2004-2010\/\" data-rt-link-type=\"external\">post<\/a>)<\/li>\n<li>Groupon:\u00a025.1%<\/li>\n<\/ul>\n<p>However, as impressive as they are, these numbers don\u2019t show the entire story. They hide various operational and industry dynamics that are only possible in the sectors in which those companies operate. For example,\u00a0the\u00a0<a href=\"http:\/\/thedrawingboard.me\/2013\/07\/15\/whats-your-real-customer-acquisition-cost\/\" data-rt-link-type=\"external\">cost of acquisition<\/a>\u00a0and the sales cycle for each of these businesses might be drastically different than yours. Looking at these figures as a 1:1 to what you have to achieve might create an insecurity complex and frustrating unit economics. Effectively, you can\u2019t compare oranges with apples. They\u2019re impressive for sure, but are they applicable to your company and is it realistic for you to sustain those kinds of numbers in the long term?<\/p>\n<p>Whilst the above point might seem self-evident for extreme cases, I\u2019m always surprised by what I hear some founders receive as feedback from investors when being compared to idealized growth cases.<\/p>\n<p>Let\u2019s kick things off with the easiest form of growth to talk about, user-growth in any kind of network effect business where monetization is not the immediate short-term goal. The most typical example will be social networks.<\/p>\n<p>These kinds of companies are the ones that are the most referenced to when looking for ridiculous growth rates. Facebook and Twitter in their early days are good examples. However, before we get into what kind of week-on-week growth is impressive, let\u2019s tackle one very big point that makes any growth meaningful.<\/p>\n<p>If the business\u2019s successful growth allows it to have lock-in effect, then a non-monetized growth strategy early-on makes sense as a way to monopolize the customer-base and once locked-in, monetization strategies can be considered without fearing user-growth-rate loss and churn to competitors and\/or substitutes.<\/p>\n<p>Not all businesses that embark on a non-monetized high user-growth rate strategy truly have lock-in capabilities so it is not unusual to have these be the ones most investors are less interested in. If there is any risk that you might fall into this category, start thinking about what could make your user-growth rate create a lock-in that no competitor could make you lose.<\/p>\n<p>For these kinds of businesses where user growth rates are what is\u00a0being used as a proxy for future revenue, a 6-10% week-on-week growth rate will be considered as impressive. Above 10% week-on-week would be considered as boss-level growth, as can be seen from Facebook or other companies mentioned in the Quora post above. Only a few companies frequently achieve these levels. Other impressive growth rates from companies falling into this category can be seen\u00a0<a href=\"http:\/\/techcrunch.com\/2014\/11\/25\/tumblr-overtakes-instagram-as-fastest-growing-social-platform-snapchat-is-the-fastest-growing-app\/\" data-rt-link-type=\"external\">here<\/a>.<\/p>\n<p>Once a company decides it needs to be charging early-on because its product doesn\u2019t have a network effect built-in (or where there are plenty of substitutes in their market), one can expect the company to be measured by a different set of growth rate standards. Although there are always exceptions, once money is involved, things get more complicated.<\/p>\n<p>There are several factors that can generate a different set of growth rates, with the main ones being:<\/p>\n<ul>\n<li>Sales cycles<\/li>\n<li>Marketplace balancing<\/li>\n<li>Operational capacity building<\/li>\n<\/ul>\n<figure class=\"w-richtext-figure-type-image w-richtext-align-fullwidth\" data-rt-type=\"image\" data-rt-align=\"fullwidth\">\n<div><img decoding=\"async\" src=\"https:\/\/daks2k3a4ib2z.cloudfront.net\/5a4d09f22b69220001d89be6\/5a53a7a802eb7600018d66e8_Operational%20building.png\" \/><\/div>\n<\/figure>\n<p>Sales cycles can vary greatly from business-to-business and can serve as a proxy for sales growth until you actually materialize sales.\u00a0If you want a quick brief on sales cycles, this\u00a0<a href=\"http:\/\/yourbusiness.azcentral.com\/types-sales-cycles-13134.html\" data-rt-link-type=\"external\">link<\/a>\u00a0will walk you through the basics.<\/p>\n<p>Comparing growth rates of monetized companies becomes complicated because not all of them have the same sales cycles. We\u2019re back to our orange to apple comparison dilemma. Some might have a heftier cost of customer acquisition but can sell immediately (such as software download), while others might require a subscription once someone deems the relationship with the service worthwhile (such as dating sites) but might be able to leverage virality effects intrinsic to their sector or customers\u2019 needs\/desires to lower their cost of acquisition. Life isn\u2019t fair, but let\u2019s try and see how we can compare businesses in these categories.<\/p>\n<p>Let\u2019s first start by looking at companies that have a long sales cycle. These companies might have interactions with their customers via newsletters, social media, click-throughs etc. but can have frustratingly low month-on-month growth rates on conversion.\u00a0For those, a good starting point as a proxy for growth is to have engaging discussions really early on about the value you bring to your customers so you can use it as a proxy to the actual (and hopefully, eventual) conversion point. Try and find correlations between behavior and interactions with your product as a precursor to conversion between marketing initiatives (content marketing reads, etc.). This isn\u2019t easy or pretty, but having nothing to speak about on why your early customer might care is likely unacceptable. This also helps to think about what kind of \u2018features\u2019 you can build into your product that can signal the intent of conversion in the future. For example, does adding things into a wish list you\u2019ve created for customers increase conversion once key dates in the year come around (holidays or birthday).<\/p>\n<p>As a software company, you should not get caught in the sales funnel trap. Too many startups equate growth to how many deal leads are being added to the sales funnel every week. Adding X% new business to your pipeline every week is great, but if the output \u2014 closed deals \u2014 is close to nil and not growing, you have a serious problem. If you and your team are able to convert your top of the funnel demand into an efficient sales process and close deals, well done. But if you\u2019re like most startups, you will have inexperienced people\u00a0adding every possible deal lead in the world into the sales pipeline without knowing 1) how to qualify those deals or 2) whether they even fit what a typical buyer looks like.<\/p>\n<p>So, how should we think about traction from the standpoint of a software startup and their sales cycle? One important note to make is that the range of pricing varies greatly. A startup selling $100k enterprise deals will have a longer and more complicated sales cycle than\u00a0a\u00a0startup selling a $5k deal that may not require the board\u2019s or your CFO\u2019s sign-off. Investors want to see consistency in your sales execution. If you were able to close nine deals in the first quarter of focusing on sales, then they will want to see at least nine deals in the next quarter. The more deals your team closes, the better they get at qualifying opportunities, pushing the sale through, and understanding where various customers receive the most value from your product. Once you have a good idea of what your sales cycle looks like, then you should be able to shorten the cycle and in theory, close more deals faster with the same team.<\/p>\n<p>At a high level for SaaS businesses, investors want to see an absolute minimum of 100% growth year-over-year. Assuming your sales and marketing team and costs stay the same from one year to the next, investors will expect you to retain a very high proportion of customers from the first year (let\u2019s assume for simplicity you\u2019re able to keep 100% of the revenue from year one\u2019s customers by retaining 90% and up-sell another 10%). Then with the same team, you should be able to acquire the same number of customers with roughly the same size of contracts. So Y1\u2019s recurring bookings + Y2\u2019s new bookings = 2x Y1\u2019s first year\u2019s bookings.<\/p>\n<p>Aside from Sales Cycles, there are other limitations that can create an\u00a0artificial\u00a0restriction\u00a0on growth rates in early-stage companies, which make it unfair to compare companies like for like. Two examples include marketplace supply and demand balance, and operational limitations, which when optimized, lead to increased demand.<\/p>\n<figure class=\"w-richtext-figure-type-image w-richtext-align-fullwidth\" data-rt-type=\"image\" data-rt-align=\"fullwidth\">\n<div><img decoding=\"async\" src=\"https:\/\/daks2k3a4ib2z.cloudfront.net\/5a4d09f22b69220001d89be6\/5a53a7c3709dd1000122ed66_lead%20to%20increased%20demand.png\" \/><\/div>\n<\/figure>\n<p>Various successful marketplaces have used a number of strategies to capture a market and grow, but all share a common pattern, which was to start from the supply.<\/p>\n<p><strong>Shutterstock, Founded 2003<\/strong><\/p>\n<ul>\n<li>Started from the supply side by uploading 100,000 pictures on the website before sourcing buyers<\/li>\n<li>Opened up the platform to the contributors globally as demand was growing<\/li>\n<li>2013 \u2013 2014\u00a0year-over-year growth of 39.3% and 39%, respectively<\/li>\n<li>IPO 2013<\/li>\n<\/ul>\n<p><strong>Airbnb, Founded 2008<\/strong><\/p>\n<ul>\n<li>Started from the supply side by offering users who listed properties on Airbnb the opportunity to post on Craigslist as well<\/li>\n<li>Year-on-year supply side growth\/listing growth: +140% (2011-2012); +150% (2012-2013); +83% (2013-2014)<\/li>\n<li>Funding growth: $7,2k (2010); $112k (2011); $200k (2012); $450k (2014)<\/li>\n<\/ul>\n<p><strong>Etsy, Founded 2005<\/strong><\/p>\n<ul>\n<li>Started from the supply using an offline strategy: attracted sellers by attending arts and craft shows across the US and Canada every weekend \u2013 leveraged social movement, feminist blogger who were using craft as a rejection of mass-produced culture<\/li>\n<li>2015 IPO<\/li>\n<li>Growth metrics:<\/li>\n<\/ul>\n<figure class=\"w-richtext-figure-type-image w-richtext-align-fullwidth\" data-rt-type=\"image\" data-rt-align=\"fullwidth\">\n<div><img decoding=\"async\" src=\"https:\/\/daks2k3a4ib2z.cloudfront.net\/5a4d09f22b69220001d89be6\/5a53a92702eb7600018d67e3_Growth%20metrics.png\" \/><\/div>\n<\/figure>\n<ul>\n<li>32% of the seller who were active in 2011 are still actively selling<\/li>\n<\/ul>\n<figure class=\"w-richtext-figure-type-image w-richtext-align-fullwidth\" data-rt-type=\"image\" data-rt-align=\"fullwidth\">\n<div><img decoding=\"async\" src=\"https:\/\/daks2k3a4ib2z.cloudfront.net\/5a4d09f22b69220001d89be6\/5a53a80289b1e10001163ba3_actively%20selling.png\" \/><\/div>\n<\/figure>\n<ul>\n<li>GSM contribution per buyer type:<\/li>\n<\/ul>\n<figure class=\"w-richtext-figure-type-image w-richtext-align-fullwidth\" data-rt-type=\"image\" data-rt-align=\"fullwidth\">\n<div><img decoding=\"async\" src=\"https:\/\/daks2k3a4ib2z.cloudfront.net\/5a4d09f22b69220001d89be6\/5a53a7f9231ceb0001902b61_buyer%20type.png\" \/><\/div>\n<\/figure>\n<p><strong>Quibb, Founded 2013<\/strong><\/p>\n<ul>\n<li>Started with the supply side by having coffees with potential users for an hour each day<\/li>\n<li>Targeted startup founders and other tech people to have valuable feedback<\/li>\n<li>Spent ~100 total hours acquiring 40 initial members during a 3 to 4-week period<\/li>\n<\/ul>\n<p><strong>Key Lessons:<\/strong><\/p>\n<ul>\n<li>Grow\u00a0supply first<\/li>\n<li>Find the appropriate growth hack for your business to grow it quickly and make a market possible<\/li>\n<li>Ensure transactions take place by validating demand (product features,\u00a0build trust,\u00a0ease of use,\u00a0transparency etc.)<\/li>\n<li>Supply base can also become customers (i.e. photographer buyer and seller) =&gt; onboarding a customer on Airbnb means those customers can be hosts as well<\/li>\n<\/ul>\n<p><strong>KPIs:<\/strong><\/p>\n<ol>\n<li><strong>Gross Marketplace Volume (GMV) \/ aka Total Transaction\u00a0Value (TTV)<\/strong>: what is the total dollar amount being transacted through the marketplace?<\/li>\n<li><strong>Commission \/ take-rate:<\/strong>\u00a0should increase over time once the demand side starts growing and merchants become more reliant on the marketplace for their sales<\/li>\n<li><strong>Unit economics:<\/strong>\u00a0a granular view of revenues and costs of a single transaction<\/li>\n<li><strong>Basket size<\/strong>: value of each transaction<\/li>\n<li><strong>Repeated purchase rate<\/strong>: repeat customers<\/li>\n<li><strong>Demand\u00a0fulfillment\u00a0rate<\/strong>: what percentage of the time can your marketplace deliver on its promise to consumers? \u2013 correlated with consumer net promoter score (NPS)<\/li>\n<\/ol>\n<p><strong>What investors look for in online\u00a0marketplace businesses: growth metrics<\/strong><\/p>\n<p><strong>Supply<\/strong><\/p>\n<ul>\n<li>Double-digit growth on the supply side (product, merchants, workers) and some bookings and retention on the demand side<\/li>\n<li>How quickly you\u00a0can grow the supply<\/li>\n<li>How capital\u00a0efficient can\u00a0you grow the\u00a0supply<\/li>\n<li>Frequent site\/app visit and transactions are the best performing cohorts<\/li>\n<\/ul>\n<p><strong>Demand<\/strong><\/p>\n<ul>\n<li>Only when supply has been sufficiently grown<\/li>\n<li>Only switch to on demand when it becomes\u00a0purely organic (supply has reached critical level)<\/li>\n<li>Focus on\u00a0early adopters to kick start the demand as these are the people who\u00a0will see the value, after this it\u2019s a matter of how you\u2019ll get the early majority on board and how you create the brand<\/li>\n<\/ul>\n<p><strong>Summary Table for how to think of where your company\u2019s economic opportunities are<\/strong><\/p>\n<figure class=\"w-richtext-figure-type-image w-richtext-align-fullwidth\" data-rt-type=\"image\" data-rt-align=\"fullwidth\">\n<div><img decoding=\"async\" src=\"https:\/\/daks2k3a4ib2z.cloudfront.net\/5a4d09f22b69220001d89be6\/5a53a828598ebc00016963fd_economic%20opportunities%20are.png\" \/><\/div>\n<\/figure>\n<figure class=\"w-richtext-figure-type-image w-richtext-align-fullwidth\" data-rt-type=\"image\" data-rt-align=\"fullwidth\">\n<div><img decoding=\"async\" src=\"https:\/\/daks2k3a4ib2z.cloudfront.net\/5a4d09f22b69220001d89be6\/5a53a83c6ceffc000153fd86_operational%20opportunities%20are%202.png\" \/><\/div>\n<\/figure>\n<p>So, we\u2019ve covered quite a bit of ground on user growth rates, sales cycles, marketplaces and the like, but how about for businesses where there might need to be some stockpiling of inventory first before going out to the market, or perhaps R&amp;D and progress therein, before being able to announce\/launch a product, or how about ones that are just getting better and better in their internal processes and waiting for the next inflection point in demand to really scale up after a fund raise?<\/p>\n<p>For now, let\u2019s focus on the optimization of production costs that are already existing in order to better demonstrate your company\u2019s growth in preparation for a fundraising.<\/p>\n<p>Optimizing production costs leads to unlocking the ability to service more customers and, therefore, to grow faster. Until fully optimized, you will be limited not by user interest, but rather by operational limitations. Week-on-week or month-on-month growth could, therefore, be pegged to operational improvements.<\/p>\n<p>A number of operational blockades will need to be overcome throughout the customer journey:<\/p>\n<ul>\n<li><strong>Demand Generation<\/strong><\/li>\n<\/ul>\n<p>Can start manually going through a human collection of leads such as contact details etc. and is appropriate for early-stage customer\u00a0validation. The process must be automated or other lead sources secured to ensure marketing can deliver a growing volume of appropriate leads into the customer acquisition funnel.<\/p>\n<ul>\n<li><strong>Physical Sales<\/strong><\/li>\n<\/ul>\n<p>Might be limited by\u00a0the\u00a0number of meetings each sales person can schedule and attend in a week\/month- solution: study the sales funnel and automate where you can, improve use of CRM, evolve marketing lead qualifications and nurturing processes to deliver better-qualified leads to sales such that the customer is more progressed towards a\u00a0purchase by\u00a0the time they are handed to sales. Adding more sales people without optimizing these other pieces will likely see CAC not improving as the business grows<\/p>\n<ul>\n<li><strong>Onboarding and Support<\/strong><\/li>\n<\/ul>\n<p>Manually\u00a0onboarding and supporting customers is ok in\u00a0early customer\u00a0validation phase but must be automated to the maximum appropriate degree without destroying customer experience to avoid a bottleneck. Often an automated\u00a0onboarding and support experience (with good monitoring, alerting and access to help) can improve customer experience\u00a0as they can work at their own pace\u00a0and not need to fit\u00a0into a\u00a0schedule<\/p>\n<ul>\n<li><strong>Impact on Customer<\/strong><\/li>\n<\/ul>\n<p>Process innovation by reducing issues internally and unlocking a new rate of growth. Marketplace growth requires balanced growth and should result in week-on-week growth.<\/p>\n<p>In conclusion, there are many variables that can be used to determine a company\u2019s growth and traction \u2018by proxy\u2019. In a recent chat with Jeff Lynn, founder of Seedrs, he said \u201c<em>the appropriate unit of time to measure a business\u2019s growth varies from company to company. One of the things we\u2019ve found with Seedrs is that month-on-month growth rates aren\u2019t particularly helpful because we\u2019re too spiky in terms of monthly transaction levels. When we look at month-on-month, one month we\u2019re over the moon because we\u2019ve grown 200% over the previous month, and then the next month we\u2019re in despair because we\u2019ve shrunk by 50%. We\u2019ve now moved to measuring everything on a quarter-by-quarter basis \u2014 even that isn\u2019t perfect, and our real cadence is more like six months, but we\u2019ve had to balance that against the need to iterate and adapt quickly enough (although in our Series A fundraising materials, we should everything on a six-monthly basis, and it worked just fine).<\/em>\u201d<\/p>\n<p>Hopefully, this post has given you a new way of looking at some potential ways for you to start tracking growth in your company to create a more compelling case for future investors.<\/p>\n"}],"blog_layout":"v2"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.1 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>How to Show Growth and Traction for Fundraising | SeedLegals<\/title>\n<meta name=\"description\" content=\"Here are the various forms of \u2018validation &amp; traction\u2019 that you can potentially leverage in conversations with potential future 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