September 16, 2008

Pre-Revenue Traction

You’ll hear the term traction a lot in the start up world.  It is increasingly becoming a standard peice of industry vocabulary but most VC’s and angels I talk to or whos’ blogs I read use it in a slightly different way than the business world as a whole does.  Typically in other fields you would hear people talking about “traction in the market.”  That is customers, sales, marketshare.

From my experience, when discussing a startup company, traction usually means something like progress.  How far along is the business?  What has been accomplished?  Sales, customers and marketshare are probably about the best progress most of us can hope for but it is not the only traction that has value.  Is the business something that came to you in a dream last night or do you have a completed, patented, tested product that is already generating buzz in the marketplace?

As a consultant for FundingUniverse most of the entrepreneurs I work with have some understanding of traction but often only on a superficial level.  If I were geekier I would say “they don’t grok it” but I think you need to be fluent in at least 3 programming languages to use that word and not sound like a complete dork.  I’ve seen this misunderstanding of traction exhibits itself in two ways:

  • “I have a great soup recipe and for only $10m you can get 10% of my company.”  This is a real example of an entrepreneur that, not having any sales, decided his valuaiton should be based on the next best thing, his pro forma financials.  Of course this example can be used to demonstrate a large number of things but for our purposes, he didn’t have sales so he just ignored the idea of traction.
  • “The Unit Manager I worked with at Haliburton said he wants to buy 4 for $2m each as soon as they are ready and will probably buy more latter.  He’s really excited about the idea.”  This piece of information didn’t make it to the first 4 investors my client had talked to.  It wasn’t a real sale so it wasn’t traction, right?

I could go on and on with valuable progress that entrepreneurs don’t think to mention but I hope you get the point.

Entrepreneurs should know that pre revenue traction can be valuable and while you will always do better with investors having actual sales, if it is significant it should be touted.  FundingUniverse rates business plans for our investors on a scale of 0 to 4 stars.  One star is for traction.  It is one of the largest determinates of the value of your company.  When soliciting funds from equity investors the more traction you have the better.  It will help determine how likely you are to get funded, how long it will take and your valuation.  so it is critical for entrepreneurs to have a clear understanding of what actual progress, traction, their idea has.

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