Why Traction is Important for Raising Capital

The following post is an excerpt is from Chapter 2 of the book Startup Seed Funding for the Rest of Us: How to Raise $1 Million for Your Startup – Even Outside of Silicon Valley, by Mike Belsito. This chapter specifically talks about the importance of finding traction for your startup, even at the earliest stages of building a product and raising seed capital. Further, this chapter discusses specifics on what entrepreneurs can do to build up that traction at these early stages. 

CHAPTER TWO
The Only Chapter You May Need to Read

Traction: It’s what investors everywhere are looking for in order to determine whether to anoint your startup “the next big thing” and inject the cold, hard cash needed to accelerate your business. If you can’t find traction, forget raising capital – your business will struggle just to stay alive. Find traction, and raising capital will never be an issue for you. It’s important, however, to understand what traction really is – and what it isn’t.

Traction is not about raising capital.

Your ability to get a dollar of investment from one investor, and two dollars from another investor the very next day gives you investment momentum but it does not give you real business traction. Convincing investors to give you money does not get you any closer to determining whether or not you have a business on your hands. The only thing it proves is that you have the ability to convince investors to give you money.

Traction is not getting a press hit from Mashable or Huffington Post. 

Media coverage can be nice. It can result in spikes in traffic and can serve as a nice marketing piece to send to a potential customer when pitching your business. But media coverage is not traction. It’s not a growth engine that your business can rely upon. After all, the traffic that an article brings may not be bringing you the kind of traffic you want.

Traction isn’t even necessarily about getting users or generating revenue. 

Not all users or customer dollars are created equal. You start off having a very specific plan for building your business. If that plan includes selling $99 monthly memberships for your software-as-a-service business – and instead you convince a customer to pay you $250,000 to do a custom software development project – not one dollar of that quarter million is proof that your core “engine of growth” will actually work (unless, of course, your business model included offering custom software development work). It doesn’t mean that you shouldn’t take on that custom software project. In fact, a project like that could help fund your business. Just don’t mistake it as traction for your core business.

Traction is what separates a viable business from a really good idea. It’s what shows that your business can grow and sustain itself. It’s a way to show that a dollar invested into your business will always result in three dollars of revenue. It’s the proof that your business model isn’t based on assumptions, but on actual hard data.

Most startups, especially at the stage where they’re seeking seed capital, don’t have true traction. They may have a great idea, solid team, and good plan, but they rarely have any demonstrable proof that they have an actual business on their hands. Fundraising can be a struggle for these teams, especially outside of Silicon Valley, where the risk tolerance of investors tends to be much lower. The more that startups can prove that they actually have a viable business, the better chance they’ll have of securing seed capital.

But you’re a startup. How are you supposed to get traction at this stage?

You feel like you need funding to get your business started – yet in order to get funding, you have to be able to show that you have a real business to invest in. What’s a startup founder to do?

In order to get to a point where you can show startup traction, consider taking the following steps.

Build a prototype

The reality is that most investors – whether they’re inside or outside of Silicon Valley – don’t invest in ideas. They invest in businesses (or, at least projects that look like they have the potential to become businesses one day). At the earliest stages, it might be very difficult to illustrate how your idea can actually be a business. So show them by building a prototype. Let them see, touch, and feel what your product will actually look like. The more functional your prototype is, the better. Mockups, a video demo, or even a more limited splash page can potentially serve as feasible prototypes for digital products. For physical products, illustrations or 3D printed prototypes are both cost-effective approaches that a founder can take in order to get to the prototype stage.

Get your customers in line.

Don’t have a fully finished product yet? Don’t worry. You can start to queue up your users and customers now rather than wait until you launch. Products like LaunchRock allow you to create a customizable landing page that describes your business, and starts collecting information from people who might be interested in learning more when you’re ready to launch. Before you ever write a single line of code, you can market your product and begin to effectively build demand. Drew Houston, CEO of DropBox, famously launched a landing page and video for his now uber-popular file sharing service. DropBox’s main product, while now a mainstream tool that many rely on, didn’t even exist at the time Houston released this video. It didn’t matter. Houston designed his landing page to show what the service could look like when it did finally exist. After the video was live, Houston shared it with people in networks like HackerNews and began to build an audience. This initial marketing effort resulted in tens of thousands of potential users signing up to use the product when it launched.

Start selling to customers before you even have a product.

Most new products ultimately see the traditional “lifecycle” of various types of customers – beginning with innovators and early adopters. These two groups of customers are very open to using new technologies and products so long as it solves a significant problem or is extremely novel. If your solution can solve a specific problem for a targeted user group, they may very well be willing to pay you for it, even if it doesn’t exist yet. For these customer types, consider making a special offer. Allow them to provide feedback during the development process and have a role in shaping the final product; when completed, they will be among the first to receive it. In exchange, they should agree to pay for the product, perhaps even putting a small deposit down early on. For customers who are hesitant to agree to pay for something that doesn’t yet exist, you may consider making a non-binding offer. In this case, they won’t be contractually obligated to become a customer but if they’re involved in the development process (and especially if they paid a small deposit), they’ll be psychologically invested regardless of what their formal contract with you says.

About the Author, Mike Belsito

Currently: Author of “Startup Seed Funding for the Rest of Us; Product + Strategy @ Movable; EIR for City of Lakewood, Ohio

Formerly: Co-Founder of eFuneral; Employee #1 at Findaway World; Co-Creator of Appstand

I’m well versed at fundraising at the seed stage level (raised $1M for eFuneral), pitching (to investors + customers), and startup business development.