What is Traction and Why is it Important for Investors?

When most people hear the word ‘traction” the first thing that usually comes to their mind is the friction between two surfaces, screeching tires and halting cars. Did you perceive the same thing? Perhaps you did, perhaps you didn’t. When I first saw the word traction I was convinced it meant something like a transaction.  Google humbly corrected my misconception … traction literally does mean friction.

But what has friction got to do with investment? What does traction mean for an investor?

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For an investor, traction deviates from the meaning you will find in dictionaries. Forget friction, let’s talk about getting down to business.

Traction is THE most important factor which determines whether your idea will be backed by investors or not. It means progress. Investors want to see that your idea is not static, and that you’re working on it.  You need to show them progress in terms of product development, management teams, revenues, and all other aspects of your venture.

Why do I need Traction anyway?

New ventures turn up every day, but the sad reality is that even some of the most innovative ideas don’t get invested in. It is common for investors to turn down entrepreneurs by saying that they love the idea but they need more traction. That’s just a polite way of saying, “That’s an awesome dream, buddy, but I need more proof that you actually have what it takes to make it real.”

You might be thinking … why are investors so skeptical? Why can’t they have some more faith? Let me share a fact with you before we move on: 8 out of 10 entrepreneurs who start a venture fail in the first 18 months. In other words 80% of ventures don’t last for more than two years. (Bloomberg)

Do you see now why investors can’t trust everyone with their hard earned money? Your traction gives investors the confidence that you won’t disappoint them. Without traction, investors have no way to determine if your venture will even be successful or not.

To build traction for your startup you need to give material proof of your efforts. This is how you can do it:

Build an awesome management team

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The people who you select to work with you speak a lot about your company. Spend considerable time in recruiting the right people with a diverse mix of skills that add credibility to your company.

Your investors want to see positive, enthusiastic, hard-working and skilled people on your side. Having a good team will not only earn you traction with investors, it will also be an endorsement for you and your business.

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Having experienced and renowned professionals in your advisory board gives a really positive signal to your potential investors. Their experience lends trust to your venture which ultimately translates into traction for your venture.

Secure Strategic Partners

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A strategic partner is another company that enters into an agreement with you that aims to mutually benefit both their company and yours. Strategic partnerships can be forged with all kinds of companies.

Many business fail because they try to accomplish everything on their own. Having partners will divide the responsibility and lower the costs of expansion. It strengthens your company as a whole, and adds traction to your venture.

Acquire Customers, Generate Sales

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Actions always speak louder than words. Investors will always favour you more if you have good numbers supporting your claims.
There is always a trade-off between perfection and time. Don’t focus so much on perfection that you have no energy, time or capital left for. Remember, acquiring customers is in some cases more important than building the perfect product.

If you have the perfect product but no customers to buy it, then it’s useless for you. However, if you can make a good product and sell it, then it can give you wonders. You can always keep adding more features to it as you go along.

Once you have an idea, materialise it and market it so that people will want to buy your product. You won’t get traction by one or two sales. Traction means that you have achieve the level of projected sales, your sales graph keeps moving up.

If investors see that your product has what customers want, they will welcome it wholeheartedly.

If you’re not ready for customers, get a Letter of Intent (LOI)

Captura de Tela 2015-12-18 às 19.18.22If your product isn’t ready for sale yet, then try to get letters of intent from potential customers. The more the merrier.

Oh..Wait. What is a letter of intent?

In legal terms, it is a legal letter that is used by a party who is seeking to do business with another party. It involves all the details, terms and conditions. In simple words, it shows that a customer is willing to do business with you.

A letter of intent from a strong potential customer is in itself pretty good traction.

 

If your product is free or freemium, acquire sign ups

Captura de Tela 2015-12-18 às 19.18.45You can’t use sales as your traction if you’re offering a free or a freemium product. In this case, you can acquire traction by having a large volume of page views and sign ups on your page. To offer traction to your investors, your page should have at least a million page views, and a user base of 10,000 active subscribers.

If you segment the users and pageviews demographically, that would be a plus point for you and it will show the investors that you know what you’re doing.

Stand Out From the Crowd

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Investors are busy people and they see new pitches everyday. Even if your idea impressed them they’ll forget about you if you don’t keep highlighting yourself.

To make sure interested investors don’t forget you, keep sending them short but meaningful updates about your progress. You can update them via email by letting them know what new features you have added in your product, who are your new team members, what other developments happened in your company. If your name keeps popping up every now and then in their inboxes, the investors won’t forget you.

Traction is extremely important for investors and so it must be important to you. Most of them don’t care that you have an idea that could change the world, but all of them care if you demonstrate traction. So next time you go pitching for an investment, have enough traction in your proposal to ‘make them an offer they can’t refuse’ 😉

Memuna Umber

Memuna is an MBA student who loves learning about business, entrepreneurship, and society. She brings a lot of business and finance experience to the StarterPad team.