Startups · Entrepreneurship

Can you measure traction without revenue?

Nick Cruz CEO at Nick Software Solutions

September 11th, 2016

From my understanding and what I have been able to see things have changed a whole lot since 2005 where traction was measured on how fast you were able to acquire users (e.g. Tumblr, etc). I understand that investors at an early stage are more concerned at this point on the amount of revenues that you are able to generate. Any idea on what is the approach to measure traction if you don‘t have revenues to show?
A great idea is 1% of the work. Execution is the other 99%. In this course, we’ll teach you how to conduct market analysis, create an MVP and pivot (if needed), launch your business, survey customers, iterate your product/service based on feedback, and gain traction quickly.

Darius Lahoutifard

September 12th, 2016

Yes, Traction is not necessarily revenue, but any metrics which is consistently growing month after month, which proves that your solution solves a real client problem, ultimately leading to revenue. In a freemium business model, number of free accounts can be a traction. In Enterprise and B2B it can be pilot projects or revenue in most cases. In B2C projects it's rarely about revenue but other metrics such as time spent, number of ACTIVE users, virality, number of returning users etc.

Gabor Nagy Founder / Chief architect at Skyline Robotics

September 12th, 2016

That's all interesting insight, but once you have paying customers, why would you take money from investors and deal with all the strings?
A that point, you have a sustainable business and you should grow organically.
At that stage, investors missed their window, as far as your startup is concerned.

Darius Lahoutifard

September 12th, 2016

Gabor in most cases you are not generating enough money to pay bills. That's where VCs come in. VCs are not there for you to test the market. But once you have proof of revenue with the right product on the right market, (traction) they can "finance your growth."
Example:
Team of 5, burn rate = $20k/month - 
SaaS. Sales are $500 per month MRR (for instance 20 clients paying $25 per month subscriptions). Growing 20% month over month.
The traction is there, growth is high, all is good, but revenue does not pay bills. You need external investment

Peter Baltaxe Consultant, product leader, serial entrepreneur

September 12th, 2016

Nick, let me first try to provide the investor perspective. You (I mean this generically as any entrepreneur, not you specifically) may think you have built the world's best widget. You may have gotten some feedback from friends and family about your widget or talked to potential customers about your widget. And they have given you positive feedback on your widget. You likely have done some competitive analysis that indicates that your widget is better and cheaper then the competition along dimensions that you think are critical to customer choice. That would be great progress, but it does not indicate that you have achieved "product-market fit " (to use Lean Startup terminology). The number one reason startups fail is that there is no market for the product.

As an investor, I would never have the time to talk to enough of your prospective customers in depth to gauge whether you are solving a real pain point. I would not have the time to research the competition in depth. So the most effective indicator that customers are going to be willing to pay you for your product is the fact that they already are.

If you have paying customers it indicates:
- You have been able to execute at least an MVP
- You know how to find your customers
- You are able to market/sell to those customers (not necessarily at scale yet or profitably, but you can improve those things over time.)
- And most importantly, that your product solves a real pain point for customers in a way that they are willing to pay for your product rather than a competitive product that already exists.

That is why "customer traction" in terms of paying customers is so important to investors. It demonstrates that you are de-risking product-market fit. All that said, if you don't have paying customers, what are your best indicators or proxies? For example, have you put up a landing page and tested advertising to prove their is demand for your value proposition?

If you have a business model, where you don't sell directly to customers but make money on affiliate revenues or advertising, then you require massive scale.  Investors have become wary of those models, because of the thin margins per customer and the fact that you need to acquire all that traffic at extremely low cost, which is harder these days since the marketplace is so crowded.  If you have traction in terms of free users at large scale already, then you can get revenue by adding the ad networks.  If you are not at scale in this type of business model, you need data showing that you are accelerating your user base acquisition at very low cost.

Revenue also matters, because a company without much revenue or a plan to get much revenue for a while cannot control its destiny.  It will be dependent on raising more rounds of money to survive.  If the funding climate deteriorates further or the company misses some milestones, there is a lot of risk.  On the other hand, if a company is generating some real revenue, it can manage its burn rate, survive the tough times if necessary, and raise money on its own terms and timing.

Sidney Sclar SID the SECURITY PRO at sidthesecuritypro.com

September 12th, 2016

You might want to wait until you have revenue.

Gary Jurman Screen Printing Industry (30 yrs)

September 12th, 2016

I am curious about this as well. Every marketing experience I have had tells me that revenue is king. Customers lie about what they will pay for and how much they'll spend until the moment of truth.

I guess this issue isn't directly about your product's marketability, though, but instead about getting investors to buy your company. In this case, your company is the product. Investors are not the same kind of customer as the one who buys the product: they are buying a solution to a different problem. The obvious ones are buying a potential return on investment --the problem being where to plant their money for growth.

In a normal sales pitch, proof that a product works is a strong element to include. In selling to investors, revenue is a kind of proof that the investment you are selling them will produce a return. In a sense, your question is "Are there other forms of proof that are compelling to investors today?"

Ron Warshawsky Founder and CEO of Enteros. Years of successful experience in startup business and database technology.

September 12th, 2016

Nick, before getting prospect to pay and to become a customer, you should have a number of steps in your marketing and sales funnels that prospect should get through before the "money" step.

You should put yourself in the position to measure each step in the funnels and to be able to understand why prospects are falling off the funnel. By doing this you will be able to measure traction and also to understand what is the proportional ratio of importance of each step.

Scott McGregor Advisor, co-founder, consultant and part time executive to Tech Start-ups. Based in Silicon Valley.

September 12th, 2016

Traction measures, In order from best to worst: recurring sales (obviously),

Gabor Nagy Founder / Chief architect at Skyline Robotics

September 13th, 2016

Hi Darius. Obviously, I'm talking about the situations when you can get by / survive without outside funding.
Not when you have $20k / month of absolutely critical expenses and $500 a month revenue and a steady 20% per month growth.
DUH :)
You can always come up with some well-tailored counter-examples.
:)
Although, I would try to cut down those expenses and tough it out until my revenue can cover the bills.
In any situation, taking other people's money should be the last resort and not something to be taken lightly.