TL;DR
Traction refers to the evidence that a startup is moving forward and gaining momentum. It’s the concrete proof that a product or service is resonating with its target market, and that the company is on a growth trajectory.
Traction can be measured in several ways, depending on the business model and industry, but it often includes metrics such as:
- customer growth
- revenue
- user engagement
- market adoption
- partnerships
And many more.
How is Traction Measured?
There are various metrics that can indicate traction, and they depend on the nature of the business.
Here are some common ways to measure traction:
1. Revenue Growth
For startups that are generating revenue, this is one of the most straightforward and important indicators of traction.
Investors are looking for consistent and accelerating growth in revenue, which demonstrates that the business model is working and that there is demand for the product.
- Example: A startup that grows its monthly revenue from $10,000 to $50,000 over six months has clear revenue traction.
2. Customer Acquisition
The number of customers a startup acquires is a critical measure of traction. This could be paying customers or active users, depending on the business model.
A steady increase in customer numbers shows that the startup’s marketing and sales strategies are effective, and that there is a growing demand for its offering.
- Example: A SaaS company that grows its user base from 500 to 5,000 active users within three months is showing strong customer acquisition traction.
3. User Engagement
For startups that offer free services or are pre-revenue, user engagement can be a key indicator of traction.
Metrics such as time spent on the platform, daily or monthly active users (DAU/MAU), retention rates, and feature usage are important in demonstrating that users find value in the product and are returning to it regularly.
- Example: A mobile app with high user retention rates, where 80% of users continue using the app after three months, is showing engagement traction.
4. Partnerships and Collaborations
For some startups, especially in B2B or enterprise-focused businesses, securing key partnerships or collaborations can be a strong indicator of traction.
This could include deals with major clients, strategic partnerships with other companies, or joint ventures that expand the company’s market reach.
- Example: A startup that secures a partnership with a large corporation to distribute its product shows traction by leveraging established market players.
5. Market Share or Adoption
In industries where gaining market share is critical, demonstrating increased market adoption or penetration is a key indicator of traction.
This could be shown through growing brand awareness, media attention, or increased demand in new geographic or demographic markets.
- Example: A startup that captures 10% of a niche market in its first year demonstrates strong market traction.
6. Recurring Revenue and Subscription Metrics
For subscription-based businesses, metrics like Monthly Recurring Revenue (MRR), Annual Recurring Revenue (ARR), or customer lifetime value (CLTV) are crucial measures of traction.
Investors look for steady growth in recurring revenue, which shows that the company is generating predictable income.
- Example: A SaaS company increasing its MRR by 20% month-over-month indicates robust traction.
Why is Traction Important for Startups?
Traction is important because it provides tangible evidence that a startup’s product or service is gaining market acceptance and that the company has potential for growth.
For both entrepreneurs and investors, traction signals that a company has moved beyond the idea stage and is successfully executing its business plan.
1. Proof of Product-Market Fit
Traction shows that a startup has achieved product-market fit, meaning that its product is solving a real problem for its target audience, and people are willing to pay for it or engage with it.
Startups with product-market fit have a better chance of scaling, which makes them more attractive to investors.
2. Investor Confidence
Investors want to see that a startup has the ability to execute on its vision. Strong traction gives investors confidence that the startup is on the right path and has reduced some of the risks associated with early-stage companies.
Traction makes it easier to raise capital, as it shows the startup can turn investment into growth.
3. Foundation for Scaling
Traction provides the foundation for scaling a business.
Startups with proven traction are better positioned to raise subsequent rounds of funding, expand into new markets, and attract key talent. It demonstrates that the startup has built something valuable and is ready to grow.
4. Validation of Business Model
Traction validates a startup’s business model by showing that its approach is working in the real world. For example, growing revenue or user adoption proves that the company’s pricing strategy, marketing channels, and sales approach are effective.
How to Build Traction
Startups can build traction by focusing on a combination of product development, marketing, and customer acquisition strategies.
Here are some ways to generate traction:
1. Focus on Product-Market Fit
Before scaling, startups should focus on finding product-market fit by testing their product or service with real users, gathering feedback, and making improvements based on that feedback. Ensuring the product solves a meaningful problem is key to building traction.
2. Launch and Iterate Quickly
Launching early, even with a minimal viable product (MVP), allows startups to gather data from users and iterate quickly. This helps build early traction by addressing pain points and improving the product in response to customer needs.
3. Leverage Growth Hacking
Startups can use growth hacking techniques—such as viral marketing, referral programs, and data-driven decision-making—to drive rapid customer acquisition at a low cost.
Creative marketing strategies can help early-stage companies gain initial traction without a large marketing budget.
4. Optimize Customer Acquisition Channels
Startups should test and optimize different customer acquisition channels (e.g., social media, paid ads, SEO, content marketing) to determine which are the most effective for driving user growth.
By focusing resources on high-performing channels, startups can maximize their traction.
5. Build Strategic Partnerships
Forming partnerships with established companies or organizations can help startups build traction by gaining access to new markets, customers, or distribution channels.
Partnerships can also lend credibility to a startup, making it more attractive to other potential partners or customers.
6. Track Key Metrics
Startups should consistently track key performance indicators (KPIs) that demonstrate traction, such as customer acquisition cost (CAC), lifetime value (LTV), churn rate, and conversion rates. These metrics are crucial when presenting to investors and making data-driven decisions.
Conclusion
Traction is a critical factor in the success of any startup. It demonstrates that the business is gaining momentum, whether through revenue growth, customer acquisition, user engagement, or strategic partnerships.
Interested in learning more VC related terms? Head over to our VC glossary!