How do you prove traction to investors?

David S. Rose is doing an AMA today on Reddit. You can find it here:

I’m David S. Rose, serial entrepreneur and angel investor. AMA!

He is providing great answers…

Here is one question and answer that he gives. The question is “What is the best advice you can give to someone looking to raise funding for the first time?”, and the second part of Rose’s answer is this:

Second, even assuming that your business is of the right type, be sure that you are seeking capital at the right time. That means after you have some indication of repeatable traction. Investors simply do not fund ideas or plans or even (in most cases) prototypes. There are so many tools available these days to help you start a company that the bar has been raised quite high when it comes to raising money. Since only one out of every 40 companies that seek it will be able to raise from angels, and only one out of every 400 from VCs, the competition for capital is really, really stiff. And faced with two ventures, one of which has ideas and talk and the other of which has proof of traction, which way do you think investors will go?

So then the question would be, “what would provide proof of traction to an investor?” Here are several different things that would be convincing to investors:

  1. You have created a physical product, a SaaS service or similar, and you have convinced a hundred customers to buy. If you go look at this page, the 100-customer mark was the point where Michael Brand was able to go out and raise $3 million in VC funding. The 100-customer mark did not represent a huge amount of money for Dor. It was only $20,000 plus $5,000 per month. But it was a convincing number of customers (especially if the pace of sales is increasing).
  2. You have created a product, an SaaS service or similar, and you have created a reproducible business model where you are in the range of CAC*3=LTV or even CAC*4=LTV. So if the average lifetime value (LTV) of your customers is $160, and your cost of acquiring a customer (CAC) is $40, and you have done this 100 to 200 times to prove that it is not a fluke, an investor would consider this to be an excellent sign of traction. What you would say to the investor is that you are seeking money so that you can accelerate the marketing process so you can increase the number of customers.
  3. You have not created your thing yet, but you have gone around and described your thing to potential customers, and you now have 25 or 50 letters of intent in hand. If these customers are reputable, the letters of intent are essentially sales. These LOIs can help secure seed funding.
  4. You have not created your thing yet, but you have created a preliminary landing page for your thing, sent 1,000 people to the landing page with ads, and 10%+ of them have entered a credit card.
  5. You have not created your thing yet, but you have done surveys of 500 people as they are exiting home shows in your area (these are the kind of shows at the civic center catering to home owners. There are similar kinds of car shows, bridal shows, RV shows, etc.). 70% or 90% of these people say they would buy your thing if you brought it to market. This is not as strong a proof point as the previous because no money has been spent. But a really strong response like that is meaningful, and you would likely have luck testing a landing page as well.
  6. You have created something on the web and it is showing natural resonance at a high level via word-of-mouth alone. You can show traffic statistics and there is an obvious trend line of growth.  Facebook, Google, YouTube, Dropbox, etc. all had this characteristic. See also the magic triumverate.

Any of these proof points would be valuable when approaching investors. As long as the rest of your pitch and your team is sound, these proof points would be meaningful.

 

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