What is the role of startup traction in raising capital?

The raising of capital is one of the most important stages in the growth process of the startup, it is even considered a milestone in the history of the company because of what capital injections represent. The preparation to present yourself to an investor is of great importance and it is not enough to know that you have a great product, the presentation of metrics is essential for decision making. The traction of the company is one of the factors that will determine its ability to obtain financing.

It is common for a mutual fund to balance the benefits it will get from the company against the risk and uncertainty of financing it, particularly in the early stages of growth. Therefore, the documents that you present, such as the pitch deck or the financial run, are essential to evaluate and assess whether your project is viable and likely to succeed or not.

One of the data that is extremely relevant is traction, since this metric defines the progress of your company, how your business model will evolve in the market and its adoption, with this you will demonstrate if the future results look positive.

But what does traction indicate and how do we measure it? Traction indicates that you have validated, even initially, your business model, that you have a product, a market for it, and that, in turn, there are consumers who are willing to pay for it. It encompasses variables intrinsically related to profitability, earnings, as well as new users and customers.

One of the first indicators is related to income, as irrefutable proof that there is customer acquisition and monetization.

Another is related to the ability of your company to attract users and retain them. These two concepts are associated with the Customer Acquisition Cost (CAC) and the Customer Lifetime Value (CLTV). The first expresses how much it costs you to attract a new client in a given period, encompassing all the costs invested. If there is traction, the CAC will be less than the CLTV, we recommend you review the note where we explain each of these. These data will give the investor the key to know if your business model is profitable.

We recommend that you do not focus on the wrong objectives when presenting your project to an investor. Do not overload the importance on your product or service, but on the size of the market, the strategies you have in mind to approach it, the CAC, CLTV, or sales forecasts.

Although there is no general rule to evaluate traction, it depends on many factors as we pointed out above, the size of the market, the competition, what each investor requests, etc. However, if we believe that a startup has a chance of success, its customer acquisition strategy is sustainable over time.

Traction is a very relevant topic when looking for money, more articles are going to be published soon on the same topic to equip you to face this challenge successfully. Please keep an eye on the “Paid For Article” site.