How to pitch to investors: insider tips to get funded
Get the lowdown on what investors look for when you pitch. We’ve gathered insights from top VCs and angel investors to b...
Traction: the ultimate startup dilemma. You need funds to get it, but investors want to see it before they’ll give you money. So what’s a founder to do? In this article, we cover what traction means, why it’s important and how to demonstrate it to investors (even when you don’t have much yet).
📽️Watch: How to demonstrate traction
SeedLegals co-founder & CEO Anthony Rose shares his insights on how to demonstrate traction 👇
What startup traction is
Having traction means you have something tangible to show for your business idea and can prove that there’s opportunity for your business to be successful. You can show traction through:
- Customer / user acquisition
- Products or an MVP
- Media coverage and content
- Growing website traffic
- Positive customer reviews
- Signed business partnerships
- Revenue gained
We’ll cover this in more depth below.
Why traction is important
You need to demonstrate some sort of traction to investors to get funding. The more traction you have, the more investable you are. Traction helps investors understand how fast you’re growing, how the funding they provide will be used and how they could eventually gain from the investment.
Anthony RoseInvestors have their analysts or associates scour the internet looking for companies with signs of traction. So if you can exhibit traction, you’re going to be way more investable and open up opportunities.
CEO & Co-founder,
How to demonstrate traction to investors
There are many ways you can show traction to investors. If you don’t have it in one area, you can make up for it in another.
The main goal is to prove that people love your product and that you can make money selling it while running your business efficiently. Remember the goal of the investor is to see an exponential return on their investment in five to ten years. How can you show them you’re on your way there?
Kirsty MacdonaldFounders should show anything they can to demonstrate consumers love the product and that there’s good commercial opportunity for it. Indicators of this are things like:
– capital-efficient growth
– multiple channels for customer acquisition
– low CPAs (cost per acquisition)
– quick paybacksBut not all businesses have this yet, especially if monetisation is only coming later. If that’s the case, you can show consumer interest through user growth and engagement or amazing online reviews and social buzz.
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Create an MVP
A minimum viable product (MVP) is the first indication of traction. It means you’ve taken your idea and put it into action. You need an MVP to test on users and to demonstrate your idea to investors.
Show low customer acquisition costs
Investors look at how cost-effective it is for your company to acquire a customer and if that customer comes back and buys again.
Kirsty MacdonaldThe two metrics I love to see presented are organic acquisition and repeat rate because if consumers love a product they:
1) tell their friends about it and
2) buy again.If organic acquisition is over 50% in early days, that’s strong. Repeat rate very much depends on your sector and business model. Typically it’s good to get to a minimum of 3x LTV:CPA over 3 years but hopefully into the 4–5x range.
Principal,
Jargon buster
LTV:CPA stands for life-time value: cost per acquisition. It’s a ratio that compares how much a customer spends with you overall to how much it costs the company to acquire them. If your LTV:CPA is 3:1, it means the company gains back three times the amount of money from that customer than it took to acquire them. This means your marketing costs are efficient and you’re profiting from the money you spend on gaining customers.
LTV:CPA stands for life-time value: cost per acquisition. It’s a ratio that compares how much a customer spends with you overall to how much it costs the company to acquire them. If your LTV:CPA is 3:1, it means the company gains back three times the amount of money from that customer than it took to acquire them. This means your marketing costs are efficient and you’re profiting from the money you spend on gaining customers.
Summon social buzz with content marketing and PR
Be seen. Gain followers. Gain traffic. You need to get people to know about you and become discoverable online to investors and potential customers. If you have nothing to show yet, you can always create content to generate buzz around what’s coming and position yourself as a thought leader in your field.
Anthony RoseContent marketing should be one of your first steps. Create thought leadership articles. At SeedLegals, we’ve got hundreds of articles because I think they’re super important. Get your articles out there – on your website, on social media. Have them published on other websites and publications where the right audience will see them. You want to spread the word so that people will find you. Plant the seed right at the beginning through content marketing. This will also generate traffic to your site, which is another good growth metric.
CEO & Co-founder,
Some ways to gain social buzz include:
- Articles on your website
- Media coverage on other sites and publications
- Webinars and events
- Web traffic growth
- Social media growth
Learn how to get press coverage on a startup budget: watch the webinar recording here
Run demand testing
Investors want evidence that there’s a demand for your product. Can you show that people want to pay for your product? If you’re a B2B company, can you show signed contracts with business partners?
Kirsty MacdonaldWe like to see strong demand testing in terms of first party consumer research. Ghost sites or staging sites are one way. Get potential customers to go through the entire purchasing journey, even if you don’t yet have a product to ship, you can get them on a waitlist or to pay deposits. This will give a good indication of potential sales numbers that you can use.
Principal,
Show user numbers and retention
Can you show that people are interested in your product, using it, and want to keep using it? Start growing a user-base of either free-trial or paying customers as soon as you can.
Kirsty MacdonaldIf you’ve got users, show your user numbers growing. If you don’t have a good figure for growing user numbers, talk about retention. You can show you have a small amount of customers who are engaged, they’re staying subscribed and not churning. You can show, for example, that there was a churn rate of 12% last month and 8% this month to demonstrate retention.
Principal,
Shout about customer satisfaction
Ratings are the road to success. Remember that your goal is to show that people (or other companies) love your product. Make it a priority to demonstrate customer satisfaction. You can do this in the form of reviews, rating, recommendations and testimonials.
Grow your team (if it makes financial sense)
Employee growth is another good way to demonstrate traction. Investors look at employee growth rate as an indication of your progress. But that only applies if your hiring makes financial sense – it’s a balance between keeping things lean and efficient, and hiring so that you can grow.
Put your performance into context
Show how you measure up against competitors in the market. Get as many metrics as you can about companies and show where you sit in comparison. What are the main trends in your sector? Are there other companies globally who have proven a similar model or product in a different region? Exactly how are you going to be better than what’s currently available?
Kirsty MacdonaldIdeally there is some sort of benchmarking exercise you can do. Remember investors look at a lot of different sectors and markets, so it helps if you can educate us about your industry – what do the average margins look like, for example, and how are you outperforming that?
Principal,
Talk about your revenue
Show your growth rate through revenue and projected revenue over the next few years. Be transparent, don’t be unrealistic and remember that revenue needs to be shown against the cost of running the business. You need to be smart, steady and efficient. If you don’t have any revenue, there are plenty of other ways to show growth, including the ways we’ve covered above.
Kirsty MacdonaldI must stress that a company that’s generated X amount of revenue but has taken three times the amount of capital to get there is often not as interesting as a smaller but much more capital efficient business. So always contextualise your growth with how much funding you’ve had.
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Is your company pre-revenue? You might benefit from reading our article: How to value a pre-revenue company and what metrics to show investors.
Build a dream team
One of the most important things to investors is the quality of your team. If you can build a strong leadership team for your company, you’re at an advantage. Be sure to show who’s on your team and what their credentials are as often as you can. Most importantly, you’ve got to show why you’re the right person for the job.
Kirsty MacdonaldFinally, you need to convince the investor as to why you are the person for this – the founder-market fit. What experience do you have that gives you an unfair advantage here vs other great teams?
Principal,
Early stage vs later stage
How you show traction will vary greatly depending on the stage of your startup. In the very early stages you’ve got less to show and it’s more about demonstrating potential and viability. But in the later stages, you’ve got to show growth metrics and profit-loss margins.
Kirsty MacdonaldWe invest in businesses at various stages, including pre-launch. For pre-launch ventures the traction we look for is some sort of MVP as well as some testing conducted by founders that shows there really is demand for this product and a venture scale exit is, at least in theory, possible. The rest of our due diligence goes into the team and market.
For post-launch companies, we closely examine the shape and development of monthly profit and loss to understand the company’s growth and margins. We typically look for about 15% month on month growth and strong margin potential.
Principal,
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