While the phrase ‘traction’ has typically been associated with tyres, friction and slippery driving conditions, its use is increasingly common in entrepreneurship and venture capital circles. This article explores what it means and how it applies to your business.
The typical entrepreneurship journey moves through various stages, from idea conception to business plan to execution and then growth (or failure). For most entrepreneurs, the journey is challenging because they need to perform many activities simultaneously while always being conscious that they may run out of money in the near future. To fund this gap, investors often turn to early stage investment, which they are more likely to get if they can prove traction – some clearly identifiable momentum and progress so far.
Investors need to carefully balance risk and return and will be well acquainted with the harsh realities of early stage investment, i.e. that most startups fail. As a result, they will be trawling through the evidence you provide (often in the form of a business plan) to assess whether or not a commercially viable business opportunity exists in which they should invest.
For the most part, investors will need to take a leap of faith with early stage investments, relying on the assumptions contained within your business plan to help them decide whether or not to invest (and if so, on what terms). If you, the entrepreneur, can demonstrate that you have gained some traction, especially by proving customer demand with a record of actual sales, you are essentially reducing the risk for them; factual evidence will always trump assumptions, projections and wild conjecture.
The most persuasive evidence you can provide that your business is worth investing in is ‘evidence of demand’. Clearly if this demand is translated into sales, you have irrefutable evidence that the startup has traction. The greater the sales, the greater the proof.
In terms of the ‘traction hierarchy’, active users and letters of intent probably fall into the next tier, below real sales, finally followed by viewer numbers (on your website). While growing visitor numbers to a website was once a good barometer of the potential of a business, it is no longer considered a valuable proxy. These visitors have to convert to sales and, hence, the focus returns to the one piece of evidence that trumps all others – real sales.
Why is all of this important?
One of the problems entrepreneurs face is that their energies and focus are spread widely, as they can get distracted by the most pressing challenge to hand (regardless of its relevant importance in the bigger picture). There is so much to do and so little time. Hence, they can have an excessive product orientation, focusing predominantly on product design, without really addressing wider concepts such as addressable market size, customer acquisition costs and sales forecasts, etc. Business plans can really help ensure entrepreneurs retain focus. They force you to take a holistic view of your business opportunity. However, not all entrepreneurs embrace the principles of business planning, and even those that do may not have a strong focus on ensuring all activities are correlated with the core aim of gaining traction.
Entrepreneurs need to conclusively demonstrate that there is strong evidence of demand. They need to concentrate efforts on the area of product /market fit, a concept Steve Blank has explored in detail in his book, The Four Stages of the Epiphany. Blank states that the primary role of an entrepreneur is to iterate and test assumptions and hypotheses they have made with regard to customer behaviour and demand until they find a commercially viable business model.
‘Your startup is essentially an organization built to search for a repeatable and scalable business model.’
In other words, Blank is arguing that your primary role as an entrepreneur is to ensure there is a good fit between the product and the market and, if there is, you can gain traction from which you can then scale your business.
There are numerous reasons you may not be gaining traction, the most common being the lack of customer awareness about a new product or company. Nowadays, competition is increasingly intense, and it has shifted from being within a market sector to what is essentially a competition for people’s attention. This issue is particularly relevant to Internet-based startups who assume the old adage, “if I build it, they will come”, will apply. People may simply not be aware of your product. For others, they may find that it does not meet their needs, or there may be switching costs preventing them from testing it.
How do you get traction?
Gabriel Weinberg has written a nice post covering various ways a group of entrepreneurs he interviews gained traction. Essentially he is describing a range of marketing activities his interviewees have used to ‘get the word out’ about their product or service. Of course, underpinning all of this is the fact that the message relates to a core product or service that has to address a market need. In all markets there are key influencers (often media) who are good conduits to your target market. Similarly, there are ‘early adopters’, who are individuals willing to test new products and are not averse to risk.
What is enough traction?
The amount of traction required depends on the risk appetite of the investor. The more traction you have, the greater your ability to dictate terms when seeking external investment. Choosing between competing term sheets is a problem most entrepreneurs would love to have. As venture capitalist Mark Peter Davis declares in his blog:
“..investors want to know that a company can repeatedly acquire customers for $X and generate more than $X in gross profit from each customer”.
However, as he goes on to say in relation to what is enough traction:
“In sum, there are no hard-and-fast rules, but when an investor suggests that you obtain more traction it’s because they still need to be convinced that your customers are going to adopt en masse”.
What to do when you do not have enough traction
For me, modest user adoption cannot be excused because you are still in beta. As stated previously, customer acquisition is the clearest signal that you are gaining traction. If you are not seeing growth, it may be that you need to invest more in marketing, undertake some internal market research or some competitive analysis. The last thing you should do is continue along the same path without understanding why adoption rates are not at the level they need to be. Perhaps you need to pivot what you are doing, or consider a Plan B? PayPal is a great example of one such company that went through numerous iterations before settling on an email payment system. As founder Reid Hoffman described recently:
‘Over the years PayPal has made multiple significant pivots. The company started as a mobile encryption platform. Then it was a mobile payments company. Next PayPal was a combination mobile and Web site payments company. Finally PayPal became an email payments company. Each pivot over the life of the company was the result of rethinking the business but maintaining the vision. The focus was always to become a payments operating system; but the nature of the operating system changed multiple times.’
Summary and Conclusion
In summary, all entrepreneurs need to be aware of the concept of traction and its importance in the context of early stage investment. The best form of evidence you can provide is paying customers who keep coming back and telling their friends about your offering. If you can gain this level of traction (with meaningful numbers) the strength of your hand (when it comes to negotiating terms for investment) has improved significantly, as have the chances of success for your fledgling business.