What The Heck Does “Traction” Really Mean To A VC?

What The Heck Does “Traction” Really Mean To A VC?

Nearly every entrepreneur has heard the refrain, “Get back to me when you have some traction,” while seeking funding. From an unsophisticated investor, this response might be a non-confrontational way of saying “No.” However, when uttered by most Venture Capitalists (VCs) it conveys a desire to obtain validation of your venture’s value proposition from dispassionate, objective third parties. In this context, your “value proposition” is defined as the utility you claim users will derive from your solution.

When you hear the word “traction” think “objective validation.” Once people who do not know you and have no vested interest in your company’s success begin expending their time, money and resources to leverage your value proposition, you are gaining traction.

If you haven’t already subscribed yet,
subscribe now for free weekly Infochachkie articles!

Triangle Of Evidence

Evidence of validation manifests itself in many forms and is derived from a variety of market forces. Five broad sources of independent, third-party validation are: Customers, Partners, Distributors, Industry Experts and other Stakeholders. Each of these constituents is represented below in the Triangle Of Evidence that you must build in order to demonstrate that your venture has achieved meaningful traction.

The Inequity Of Validation

Not all validation is created equal. For instance, validation that directly supports your company’s underlying value proposition is more valuable than corroboration that indirectly suggests customers might ultimately adopt your solution. As shown below, the most impactful form of traction is when your venture repeatedly convinces rational, third-party customers to happily part with their hard-earned cash, at a market price, in exchange for your solution.

However, not all ventures are mature enough to generate paying customers. Fortunately, for such startups, there are a number of precursors to paid customers, such as: trial users, freemium customers and qualified prospects.

In some industries, lengthy pilot tests are required before an enterprise customer will sign a definitive purchase order. In such cases, always extract meaningful compensation from these pilot customers to offset your costs and to increase the likelihood that the pilot user will convert to a paying customer. Free pilots typically have a lower conversion rate, as the lack of a financial decision at the outset of the relationship reduces the thoughtfulness in which the prospect enters the pilot.

The following manifestations of traction are not intended to represent an exhaustive list. Rather, they serve to illustrate the relative value of common sources of validation, from the most to least impactful.

The Three P’s: Positive, Polite And Persistent

So what do you do once your venture has traction? As noted in 6 Steps To Raising Venture Capital, as you accomplish your previously communicated milestones, send your target VCs a brief email update (think eye-candy graphics and charts, not dense text). These updates will demonstrate your ability to execute upon your stated objectives and will help you stay top-of-mind in the VC’s chaotic world.

The cadence of such communications should be as consistent as is practical, with a tone that is always be positive and polite. Although I have always been extremely persistent in my professional follow-up, no one has (yet) issued a restraining order asking me to back off. In a like manner, proudly profess your traction to your target VCs until they either write you a check or ask you to look elsewhere.

Follow my startup-oriented Twitter feed here: @johngreathouse. I don’t tweet  about unicorns, NBA Memes or photos of food I am about to devour – just startup stuff. 

Note: The Triangle Of Evidence was stolen from Frank Foster, a friend, talented investor and Managing Director of DFJ Frontier, a successful, early-stage VC fund.

 

Photo Credit:  ralphbijker via Flickr

John Greathouse

John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

Twitter LinkedIn  

Tags:
  • Professor Greathouse,

    This is a great post, something I’m currently learning in the real world. Just today I got an email back from Lightbank- they told me that it’s simply too early and to follow up when I have a prototype with some “traction.” I think that oftentimes young entrepreneurs, such as myself, fall into the trap of believing that their concept is an “early-stage” start-up… when the reality is that it’s well… no more than a concept.
    In fact, you need to suck it up and create a prototype even to find a dedicated co-founder. I fall into the “Hustler” category but my concept relies heavily on a beautifully designed website. It’s sort of a catch 22 but I have realized that in order to find a much needed expert Web Hacker I need to first prove myself by creating web prototype; ironic because that is precisely what I do not know how to do. There are simply too many marketing/sales ‘hustler’s’ out there for each “hacker” (that isn’t already fully employed by Google or Facebook), and the only way to prove yourself is through traction.

  • Alijosha – it takes a team to make a venture work. There are lots of hackers who wish they could sell, negotiate and network. Your job is to find a hacker (or two) with whom you have great chemistry, in the interim, writing a bit of code won’t hurt you.

  • ZackParker

    Thank you for posting this John. ishBowl has been going through this exact scenario that you explained here. We have a couple partners with a combined social media reach of over 3 million people and we have the largest content distributor in the action sports space interested in partnering with us, but we have yet to officially launch so we don’t have “user traction”. We have had numerous discussions about acquiring users versus obtaining partnerships. We have been battling between preparing for our next meetings with YouTube, Nike and Red Bull or solely focusing on user acquisition. What would you do?

    Thank you for sharing and any insight that you could give on our scenario would be greatly appreciated.

    Cheers,
    Zack Parker

  • Zack – it is easy to slow down discussions with large companies without damaging your relationships. If the issue is binary and you have to chose between cultivating more partnerships or focusing on user acquisition, I advise you (from the outside looking in) to go after users.

    The more happy users you gather around you, the easier it will be to land partners under advantageous terms.

    Best of luck

  • ZackParker

    Thank you John. I appreciate your prompt response. I guess it is time to go out and start gathering users!

    Cheers!

Follow John’s Startup Oriented Twitter Stream!


Follow John’s Startup Oriented Twitter Stream. He promises to never Tweet about sunsets, kittens or awesome burritos.

Close
Please support the site
By clicking any of these buttons you help our site to get better
Social PopUP by SumoMe