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Prep

Funding 101: Prep

 

Traction

Traction is the very heart of a startup. When you're building from scratch and trying to convince the world that your idea has merit, the proof of your ability as an entrepreneur to be successful is in the traction you generate for your business.

There are many types of traction - forming your company, hiring staff, and of course signing up paying customers. All of them are critical to building the business, and by way of that, generating interest from investors.

Ideally you want to create traction on as many fronts as possible. The excitement of a deal, particularly to investors, is always around the momentum of a business.

It's one thing to say you have a great idea that may attract customers some day. It's another thing entirely to say that you are adding customers like crazy and the business is already taking off. Investors want to put money into speeding trains, not stalled ones!

 

Where to Get Traction

Traction isn't one aspect of your business - it's all aspects. The more areas of your business that you can generate momentum around the better.

The key here is to focus on moving forward on as many fronts as you can with the limitations in front of you.

Of course you can't always move forward on every front. You may need some funding to build a product to sell to customers, so as of right now you can't get traction there. No problem. The key here is to focus on moving forward on as many fronts as you can with the limitations in front of you.

The Bonus Plan for Traction

There's an added bonus to focusing on traction which is that while you're actually building the business you may find that your needs for funding actually decrease. Many entrepreneurs find that over time building traction eliminates many of the needs for the capital they were raising!

Formation

All of the basic elements of forming your business – incorporating, getting a tax-id, setting up a business bank account, setting up a basic website, creating your business collateral – are important in establishing that fact that your business is a real business, and not just an idea in your head.

Without these basic items you tend to get taken a lot less seriously. This is one of those situations where having the items doesn't help you a lot, but not having them costs you a lot when you're out talking to investors and customers.

Fortunately these items are relatively easy to put into place and can often be fun as you start to turn your idea into a real functioning business.

Customers

The best form of traction you can get is paying customers. If we all had paying customers the idea of raising outside capital would be far less important. But the truth is we often need to put together some initial capital to produce the product that we sell to customers.

The best form of traction you can get is paying customers.

Not all customers need to be paying customers though. There are different types of potential customers that all represent real interest in your product. Whatever their commitment, what's important is that real people who would potentially buy your product have shown genuine interest in give you money in the future.

Paying Customers

Obviously paying customers are the best form of traction you can possibly get. Nothing validates a business like paying customers.

Even if your customers aren't paying a lot for your product, the fact that they are willing to pay at all is an indication of value. Anything you can do to get a few paying customers in the door will go a very long way toward not only understanding the motivations of your customer, but also demonstrating that there is a market for your product.

Interested Customers

If it's too early to create an actual product to sell, the next best thing is to find interested customers. These are people who will testify to the fact that if your product did exist, they would buy it.

You can capture this intent in a number of ways. In a formal way you can create a Letter of Intent which would be the equivalent of a sales contract but without the actual sale. If that sounds too formal getting some recorded testimonials in print, audio, or video would help as well.

However you gather the intent, the key is to show that there is real demand for your product.

Free Customers (Users)

If you've ever walked through the food court of your local mall you've seen someone standing outside handing out samples of their product in a shameless attempt to lure you into their store. It's the oldest marketing trick in the book - giving away a taste - because it really works.

If it's possible to give away some of your product for free to gain some real customer interest and feedback, and you can afford to do it, you certainly should.

There are two benefits to signing up free customers. The first is that you get real feedback from your customers about the product, which will allow you to modify it as needed to make it better. The second is that you can let your next round of paying customers know that people are already satisfied with the product.

Product Development

Every step toward developing your product helps build traction around your company. In the early stages when you are just conceiving the product your traction will come from sketches, market research and perhaps some visual prototypes.

Later on as your products become more evolved, you may begin with an actual product, even if it's not ready for prime time, that your customers can use and provide feedback on.

Don't be shy about promoting each milestone in the development of your product. Every little bit of progress is worth noting because it shows that you are capable of moving an important process forward. That capability is as important investors as the actual product you are bringing to market.

Advisors

As you're working to establish credibility in the business, a group of seasoned advisors can go a long way toward that goal.

Advisors help you in numerous ways beyond just providing good guidance. They act as social proof that other smart people are willing to stand behind your idea.

Recruiting good advisors is another way to build traction in your business. While you may tend to think of advisors as attorneys and accountants that can provide fundamental business guidance, you may expand your thinking to include people with a great deal of domain expertise in your field.

Seasoned experts can provide the greatest benefit of all - telling you what not to do. They also open up an entirely new rolodex of potential partners, customers and investors that may not be otherwise available to you.

When talking to investors, leading the conversation with notable advisors that have joined your company will help establish so early credibility of you as an individual as well as your idea.

Recruiting a Team

Investors tend to invest in people more than anything else. The old saying "we bet on the jockey, not the horse" is typical amongst investors. That's because ideas change over time and the business runs into challenges, but a strong team can overcome a lot.

You want to find the best people to work for your company, but it's also important to realize that aside from doing great work, these people are also an indication of how strong you are as an entrepreneur to attract great talent. In many ways, the strength of their resumes is a direct reflection of your own talent.

In the early stages of your development you may not be able to hire people on full time, and that's OK. In that case consider creating agreements that would allow people to work for equity or some sort of deferred compensation. Right now what's important is getting their commitment to build the company with you over the long term, even if it doesn't mean they are working full time right now.

As you're doing your recruiting, think about how the new team members will look to customers, investors and other team members. Bringing on a seasoned Chief Technology Officer if you are a tech company would be a welcome sign that someone with real market potential has chosen your deal over other opportunities.

Summary

We can go on endlessly about the types of traction your business can use to become more fundable. But an exhaustive list isn't going to help you - actually getting any of these items moved forward will.

Traction isn't a goal, it's an ongoing effort. It should also be an effort that you are constantly showcasing to the world to let them know your company truly does have momentum that people should take notice of. Every effort every day should be spent gaining traction.