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How Much Traction Do You Need To Raise Startup Funding?

When you start raising funding, you’re likely going to hear investors tell you that you need more traction in order for them to invest in your startup. But what exactly does needing more traction mean?

Traction doesn’t mean the number of new subscribers you have. Traction doesn’t mean the number of views on your website. Traction doesn’t mean the number of free trails you’ve done.

Don’t get me wrong. New subscribers, website views, and free trails are all important, but that’s not really traction.

Traction comes down to one thing: REVENUE! That’s what traction means. So, when an investor tells you that you need more traction, it means you need more revenue to attract funding.

What do you do you when an investor tells you need more traction?

Every investor you meet with is going to have a different view on how much traction they need to invest. So, if you hear from one investor that you need more traction, I would just take note of it.

Then, I would ask the investor, “How much traction do we need?”

I wouldn’t change anything in my planning or strategy at this point. However, if the next five investors you meet with tell you that you need more traction, then I would absolutely take a deep look at my investment strategy. You get the idea.

As you can see from this chart, the amount of traction can vary widely from investor to investor:

For example, if you’re trying to raise $5 million from Venture Capital firms and you have revenue of $100,000 per month, then, if investors are passing because you don’t have enough traction, then you might want to consider raising a smaller round from angel investors instead.

If you’re trying to raise $1 million from angels and you have monthly revenue of $10,000, then you might need to reduce the amount of money you’re raising. Remember, the market, which is investors, is telling you that you need to make a change.

What can you do to get more traction?

There are so many situations that you could have. Let me go through a few of them.

First, traction takes time. And, in some cases, there’s not much you can do to increase your revenue except for time. I actually think this is good news because you’re likely doing the right things on the sales front.

Let’s say you’re not in this situation. I’ll go through the things you can do if you’re not doing them already.

You can get and out and sell! One of the classic mistakes that first time CEOs make is handing the sales function off to someone else. Here’s the deal.

It doesn’t matter if you’ve never been in front of customers before, you, the CEO, will be the most effective salesperson your company has for the life of your company. The reason is that your customers want to meet with the CEO.

Let’s say your product is sold online through advertising, and you’re getting a positive return on your advertising dollars. The answer here is to increase your advertising spend because your revenue will likely increase proportionally.

Finally, think about ways to reduce the friction in your sales process. In other words, you want to make it as easy as possible to do business with you. Examine each step in your sales process for where customers are dropping out of your sales funnel. For example, maybe you need to make it easier to demo your product or service. Then do that.

How can you raise money if you don’t have enough traction?

Let’s go back to the example where you need more time to get traction. You have to find a way to extend your runway which usually means reducing your costs.

You can reduce your salaries. I did this when I was in this situation, and it gave us the time we needed to close our funding.

You can talk with your vendors and delay your payments. You might have to do something truly painful and let some of your team go.

Layoffs associated with a fundraising round is extremely common. Indeed, this was a step that I had to take as well.

Another step you can take is asking your customers to pay in advance. You can give them a discount in return for the prepayment. Or maybe you give your customer an extra service for free in return for an upfront payment.

One final thought: The market for fundraising is constantly changing.

The amount of traction you’ll need will vary depending on your end market as I talked about earlier. It will also vary depending upon the investing environment. The tougher the environment, the more traction you’re going to need.

Finally, you can’t fight this. Remember, the person with the money sets the rules. So the quicker you recognize the situation you’re in, the better off you and your company will be.

For more, read: https://www.brettjfox.com/the-nine-facts-of-fundraising-you-need-to-know/

Brett Fox works with startup CEOs to help them grow their businesses. More: www.brettjfox.com

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