As an investor considering an investment opportunity in an early-stage startup, an important piece to examine is the startup’s traction. There are many forms traction can take, depending on the type of business and how far along it is. Here, we will be discussing what traction means, how traction may appear across different spaces, and some general indicators to look at when assessing an early-stage investment opportunity.
What is startup traction?
Another way to say that a startup is gaining traction is that it’s gaining momentum. It’s not quite to the growth stage, but it is headed in that direction. Traction is important to look at because it can indicate that a startup has achieved the early stages of product-market fit. Startups with promising traction often have a viable product, a defined audience, and are starting to grow their brand.
Traction across startup stages and business types
There is no one-size-fits-all approach when it comes to measuring traction. The most important indicators to look at will vary greatly depending on the stage and type of business. For example, an early-stage startup seeking seed funding may not have customers or revenue yet. In that case, it wouldn’t be appropriate to use customer-related or revenue metrics to evaluate its traction. For a later-stage startup that does have customers and revenue, these metrics should absolutely be considered. Similarly, a startup selling consumer goods and another selling a SaaS product will have very different indicators of traction. For a consumer goods business, metrics like units sold, distribution partners, and the number of retail outlets the product is sold in will tell you a lot. For a SaaS product, investors should look at metrics like conversion rate, registered users, customer acquisition costs, lifetime value/customer, etc.
Traction indicators in early-stage startups
Naturally, we evaluate a lot of early-stage startups. Before we dive into due diligence, these are some high-level indicators we look at to determine if a startup is beginning to gain momentum.
Getting early-stage investors can be difficult, especially for a pre-revenue startup. Aside from the obvious benefit of securing capital, startups that are able to secure funds from investors within their industry stand to gain from the strategic help and industry insights these investors may be able to provide.
Having good advisors can go a long way toward boosting a startup’s credibility and overall strategy, and typically, an advisor won’t put their name on something they don’t believe has value. This isn’t to say that a startup that doesn’t have advisors yet isn’t good; however, credible advisors can certainly give a company a leg up in its early stages.
One of the most obvious indicators of traction for an early-stage startup is customer growth, as this indicates a clear demand for what the business is selling. Plus, customers usually mean revenue. Startups that are still pre-revenue shouldn’t be counted out, however. If a startup is still pre-revenue, having a waitlist of potential customers, or having a growing base of free users are both great signs that there is interest in what they have to offer.
Partnerships with larger brands can change the trajectory of a startup entirely, and they are not the easiest to secure. For a larger brand to be willing to work with a small, limited, or pre-revenue startup indicates that they have something of worth to offer.
Social media presence
Depending on the company and industry, a strong social media presence coupled with high engagement are good indicators that a brand is growing an audience that cares about what is it doing. While social media is a less significant measure for SaaS of B2B products, it is worth considering for many retail brands and consumer products.
Traction and risk
As an investor, examining a potential investment opportunity’s traction should be a part of your own due diligence process. Demonstrable proof of traction a startup may serve to mitigate some risk associated with investment. Conversely, the less proof of traction, the higher the risk. When it comes to investing in early-stage startups, there is always risk involved. It is up to you, the investor, to weigh the potential risk and rewards.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.