Part of preparing for fundraising is getting all the traction metrics that investors, particularly venture capitalists, might want to know about. With its ability to make or break a fundraising process, this can be nerve-wracking even for the more seasoned founders amongst us.

There seem to be plenty of factors that one would like to show to help investors make their decisions, but which one of those actually matters?

Things get even more complicated when we consider that different investors might consider different traction metrics, depending on the verticals the startup is working on. For example, startups working in the deep tech sector might also need proof of concept in their fundraising process while startups in the B2B sectors might need to show their CAC payback period.

But some principles apply to almost every early stage startup.

In this article, we will look at the different traction metrics investors typically consider in an early stage startup. We will explore three factors: market opportunity, proven traction, and other deciding factors.

Market opportunity

Part of the most common reasons startups fail includes the lack of product-market fit, a situation where startups build products that the market does not need. This is why market opportunity will be one of the top traction metrics investors will look at because strong returns can only come from equally strong market shares.

Also Read: How to fundraise for Series A from a position of strength

Tech ecosystem enabler RocketSpace details the four factors that investors will consider when it comes to measuring market opportunity in a blog post, which can be summarised into these points:

Total Available Market (TAM)
TAM typically refers to the total revenue of a startup’s market, usually calculated per geographical location over a five year period. There are different ways that startups can calculate it, including estimating how much market it could gain if there were no competitors or estimating market size that could theoretically be served with a specific product or service.

Despite its importance, RocketSpace warns against putting too much emphasis on TAM as it does not always translate to high demand.

Market Share
Instead focusing too heavily on TAM, RocketSpace recommends founders talk about the startup’s potential market share or sales measured as a percentage of an industry’s total revenue. For example, if founders predict sales to go up to US$200 million in the fifth year of business, they need to be able to explain why this number is achievable.

Industry Growth
You may notice that each year, there is always a vertical that becomes more popular than the rest. For example, earlier in 2021, there was a great surge in food delivery and cloud kitchen startups, but come Q4 2021, everybody was all about metaverse and Web3. This is also one thing that investors are looking at.

International Expansion
International expansion is a crucial factor for some markets as it enables startups to tap into a bigger market. But if founders do not see international expansion as part of their agenda in the future, then it is more important to be honest about it.

Proven traction

There was no question that this would be the most important part to show a potential investor. All of the founders’ claims in the previous segment must be backed by data that includes profitability, revenues, number of active users, number of registered users, amount of engagement, partnerships or clients achieved, and amount of traffic generated.

Also Read: Navigating the capital winter: Strategies for successful fundraising in a slow market

But how about startups that are still in the pre-revenue stage? Is there any difference in how they should present this aspect?

In a Medium post, Quake Capital explains:

“For revenue-generating businesses, some examples of metrics are sales and revenue, units sold, revenue growth, and profit margins. For example, Quake would love to see growing MRR and ARR (monthly and annual recurring revenue). However, there is no perfect number. Rather, we look to see that revenues come from your business model, because ultimately that is proof of product-market fit.”

“For pre-revenue businesses, metrics may include the number of users or clients of your product or service, the number of engaged users (for example, an app may have 50,000 downloads but only 10 users per day, which isn’t great). Ideally, the number of engaged users should be close to the number of total users. We like seeing high retention and low churn. Retention is defined as the number of users or subscribers who continue using your product or service while churn is the number of users or subscribers who stop using your product or service after a certain time period.”

Team strength

If you have been following our Meet the VCs series, you might notice that there is one factor that investors will always look at: the strength of the team behind the startup. This is strongly related to the matter of trust as well as resilience; if a strong team of founders is helming the startup, even when the worst happens, they will come up stronger than before.

What kind of “strong team” do investors look at? The key here is credentials and skills. But most importantly, it is all about the team’s passion for the business.

—

This article was first published on May 6, 2022.

The post Cracking the code: Key traction metrics early stage investors seek in startups appeared first on e27.