When you're getting ready to raise money for your startup, investors are going to want to know the details of your progress and growth to date. One of the primary things investors look at is the current traction of your startup to date. To demonstrate your traction, you have to understand what it is and be able to communicate your progress with potential investors. But what if your startup doesn't have any traction so far?
For many new startups with no traction to show, investors will likely say `no.` If startups in their early stages cannot demonstrate or show growth or show that customers want their product or service, it can be a risk to invest. When you're in you're early stages, it feels like an impossible situation to get through. You need growth to show traction, and you need capital to fund that growth.
While it may seem difficult when you're in your early stages and still need traction to show your startup's worth, there are ways to raise money. Read on to learn more about what traction is and how to raise capital when you don't have the growth to prove your worth yet.
What Exactly is Traction?
Investors won't invest in a startup based on ideas or guesses. Investing early in a startup is a big risk where investors can lose considerable amounts of money. They want to be sure that by investing in your startup, their funds aren't backing a startup that doesn't grow. Traction is a way to prove to investors that your startup is either showing proof of profitability or that the product or service is in demand for your target market.
Traction is important to all stakeholders, such as founders, employees, and especially to investors. Investors want to back a company with growth potential without a major risk of losing its investment. Because of the increased risk of investing in a company with no traction, investors will be hesitant to invest.
How is Traction Measured?
Founders know that a successful business is much more than just about bringing in revenue and profitability. It's about creating a product or service that people want. Traction is much more than simply showing your sales to date. It can be measured in many ways, and investors are interested in learning about your early traction. The more evidence you can provide that your startup has gained traction, the more likely you can secure the funding necessary for growth.
There are a few ways traction is measured that can be presented to investors.
Revenue–The revenue shows the money brought in by a startup before deducting any expenses
Profitability–The profitability shows how much profit a startup makes compared to its expenses. The higher the profitability, the more likely investors will be willing to invest.
Clients and Partners–If you have a significant number of partners and clients in the early stages, it can show that you are effective at building relationships. Vendors, partners, and clients are essential to building your business, and it can demonstrate to investors that you are on the right track.
Active Users–If your startup is tech-based, you can track active users on your application to show that an audience is interested in your product. The number of registered users can help show the awareness and reach your startup currently has.
How to Raise Money for Your Startup with No Traction
Raising money can be a big challenge as it is, and when your startup is pre-revenue, it's even harder. There are a lot of tools, resources, and data that can help founders build momentum even before your product is ready to launch. Founders that have a lot of passion and enthusiasm can go a long way, but by implementing these simple tips, you show that your company is worth investing in and has the potential for major growth that is appealing to investors.
Total Addressable Market–When presenting your startup, instead of showing traction, you can identify the Total Addressable Market (TAM). TAM is the total revenue opportunity for your company and the product in the market in the market as evaluated today. Founders need to use data, research, and visuals to persuade investors that the TAM is attractive enough for successful distribution. If you can show your TAM is scalable and considerable, investors are more likely to be interested in at least learning more about your startup.
Tell a Compelling Story–During your presentation with investors, you're going to want to improve your storytelling abilities. You want to be able to show your passion, determination, and drive as you create a story about why you created the company. Your story will detail the problems in the market you hope to solve and where you can see your company realistically going. Create a detailed narrative so investors can visualize the company's potential and the value it can provide your customers.
Use Comparisons–Another tactic you can use to convince investors to fund your startup at an early phase is to create a presentation or visual on comparisons between your startup and other successful businesses in your industry with similar ideas. Detail customer dynamics and profiles, market conditions, and the potential growth for similar businesses. You basically are showing investors your competitors, detailing their success and how you plan to take them on and make your company perform better. You'll want to choose a business that is close in geography and target demographics to draw similar conclusions.
Build a Prototype–During the earliest stages, it's hard to show how your business can be successful without something physical or data backing you up. You can invest your early resources and time by building a prototype to create a physical element that your potential investors can touch and see what the product may look like. You can create mockups, demo videos, or even splash pages for digital products. Creating a prototype through 3D printing or visual illustrations are cost-effective solutions to help investors easily visualize the potential.
Sign on Partners–Before you start making revenue, you can work to convince people to partner with you to develop your product or service. Whether it's through signing a letter of intent or any commitment to partnering with you can show investors that people are willing to sign on and partner with you because they believe in your product.
Build Waiting Lists and Pre-Registrations–Before you launch, you can use the power of marketing to start building a waitlist and open up pre-registration. By creating a simple sales landing page, you can collect the data of customers who want to learn more about the product or service and get notifications when your company launches. This data can provide valuable information to help showcase the demand for your startup before you even open for business.
While investors are more likely to sign on to a startup that shows significant traction, it doesn't mean you won't be able to find an investor that sees potential. Focus on implementing these tips, and you can create a narrative that will appeal to investors and get you the capital you need to move forward in your startup journey.
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