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In early stage investing, VCs focus on four core things - Product, Market, Team and Traction. Product and Market are used to figure out whether your business looks like something that could generate venture scale returns, while they rely on Team and Traction to judge how believable it is that your company will make the impossible possible (billion dollar companies are the only thing VCs want to invest in). Team is used to judge whether you are exceptionally competent, know your domain and can build the product. While Traction, creates investor belief in a very different way.
Traction is like salt, it makes the whole pitch taste better. It is effective for one simple reason. People find it much easier to believe that things that are already successful will continue to be successful. If you grew ARR by $1m in the past six months, that’s the best evidence in the world that you will grow it by another $1m over the next six months. To VCs - past performance is an indication of future success.
Being good at highlighting the traction you have is something that differentiates great fundraisers from the rest. Unfortunately many founders are terrible at this. I’ve been on countless calls with founders who had great numbers but failed to convey that because they spent 95% of the time focusing on esoteric product details. You'd look in their data room after the call and think that they’d been talking about a completely different business!
I wrote this post to help founders weaponise traction effectively - whether that’s in their blurbs, decks or when they speak. It covers the three core traction narratives that work on VCs and how to get the evidence you need to make each one convincing. Because I'm a tryhard, I even made example slides so you can leverage these narratives in your decks easily.
Before we start, the core traction narratives are as follows:
Let’s dive in.
This is the simplest narrative to demonstrate. Early stage VCs want companies that are going to 3x or more between when they invest and the next round. There is no better proof that you will be able to do this than the fact that you are already doing it. Moreover, rapid growth provides evidence that you are working on something that users really want and it helps to reduce investor doubt about the size of the market (it’s hard to grow really fast if there are a limited amount of potential customers).
When it comes to picking the metric that demonstrates you are growing, the holy grail is revenue. VCs have a revenue centric view of the world. If sales remain low, it doesn’t matter how good your margins are, you will never build a large business. As a result, showing that revenue is growing is fundamental to making this traction narrative work, especially if you have a product that has already launched.
At the early stages, I advocate focusing on how ARR/MRR has grown over the last 6+ months. If you don’t have recurring revenue, then monthly revenue works just as well.
If you don’t have revenue, you can use other things to show that you are growing rapidly. I’ve seen success with the all of the following:
Let’s walk through each of these and their potential drawbacks.
If customers are truly on the hook to pay, you can treat and talk about pre-sales like they are real revenue. The fact that people are willing to commit money in advance actually sends a powerful signal that there is demand for what you’re building.
Showing that an increasing amount of people are using your product helps prove its value and by extension that you will likely be able to charge for it. However, for obvious reasons this is not as compelling as actual revenue.
In ad supported or freemium business models this is often fine, however, if you have something that people clearly ought to be paying for, too many users who aren’t can send a negative signal to VCs.
If you haven’t launched your product yet, waitlist signups are a useful source of signal that there is demand for it. Moreover, if they knew the price point before joining the list it also shows willingness to pay. The main drawback with waitlists is obvious, it's not real revenue. Moreover, most investors have seen several examples of companies that only managed to convert a fraction of their waitlist into paying users once they finally launched. Consequently, they heavily discount the potential revenue that your waitlist represents.
Now that we have chosen our metric, let’s turn to how to use it to show that we are growing. A complete growth narrative requires you to do the following two things.
My point here is simple, state what number you grew to! Not just the rate of growth…
Often founders say something like “we grew revenue 10x in the last year” or “our MRR has been growing really fast”, without providing concrete information on what the actual revenue number is. The listener has no idea whether they went from $1 of revenue to $10 or from $10k to $100k. 10x growth is meaningless when it isn’t grounded in absolute numbers!
Making matters worse, VCs are sensitive to founders trying to trick them by manipulating small numbers to show impressive growth. When they eventually find out that you only grew from one dollar to ten - and they always find out - at best they’ll roll their eyes, at worst they’ll consider you a liar.
Lastly, VCs always want to know what revenue you are actually at, they use this to help judge whether you are at the right stage for them. There’s a reason why, when VCs describe potential deals to each other, it always start off with a something like this:
I had a call with an interesting founder whose AI company has $100k ARR
This allows them to instantly parse whether it’s too early or too late for them. When founders obfuscate their current revenue - they bury context VCs need to judge appropriateness. And nine times out of ten “not sure” leads to a rejection email.
Another error that founders repeatedly make is that they provide an absolute number without any sense of the time it took to get to that milestone or where they were at the beginning of that timeframe. They say something like:
We have $100k MRR
Zero to $100k in 2 months is very different from $80k to $100k in 3 years. Without providing the time frame alongside your metric, investors don’t know whether you’re growing or stagnant. They will assume that you are stagnant if you don’t provide evidence to the contrary.
Talking about growth is quite simple - you can create a strong growth sentence in three steps:
This should result in something like the below - which you can sprinkle into your investor calls and put in the highlights section of your blurb.
We grew from $20k to $100k MRR in the last six months
Using this traction narrative in your deck isn’t very different. The main change is you get the chance to visualise more.
The slide should look like something like the below...
During early stage fundraising, convincing investors that customers love your product is often the most impactful thing you can do. Before Series A, a startup's revenue often isn't substantial enough to convince VCs that early sales weren’t a fluke or the result of founders aggressively leveraging their networks. Consequently, many investors use customer love as a less noisy indicator of a company's long term prospects.
If customers love your product, investors will conclude that:
Unfortunately, convincing VCs of customer love is not as straightforward as just presenting some numbers and a growth rate.
What customer love looks like varies from startup to startup. This means that there is no north star metric for founders to consistently point to. Even where there are standard ways of measuring engagement in your industry - they might not apply perfectly to you.
A better approach is to avoid obsessing over individual metrics and start from the question - “how would I prove that customers love me?”. In this section I will focus on five high level arguments that founders can use to answer this question and explain how you can best present and evidence each of them. Your job as a founder is to find data specific to your business that supports one or more of these arguments. Here they are:
“We know that users love us because…
Avg time spent on the platform, Retention (D1/7/30 etc.) , DAU / MAU…
There are dozens of blog posts telling you to use metrics A, B or C to demonstrate customer love. The problem is that most of these articles lack the context to tell you which ones (if any) are actually relevant to your business. So founders end up stuffing their presentation with all of them or including the wrong ones. To come up with something that everyone can apply, the best approach is to look at what all of these metrics have in common.
At their core, all of these metrics are aimed at showing that customers are using your product as regularly you would expect them to.
There is no stronger proof that your product is providing value to customers than the fact that they use it regularly. The difficulty lies in determining which metrics show this best and getting investors up to speed on what ‘regularly’ looks like for your specific product. A user logging into Tik Tok once every two months would be a catastrophe for them but fine for a freelancer marketplace like Upwork.
Before splattering your pitch with 100 different metrics, take a step back and ask yourself how frequently your customers actually ought to be using your product. Here are some examples of the way to think about this:
Where there are agreed upon metrics in your industry for user engagement, use these. However, don't be afraid to define new ones that make sense - especially if you are doing something radically different!
Here’s an example of custom metrics in action:
I was working with a business that sold software to law firms which helped them assess disputes. When coming up with their metrics, they realised that the average law firm had two disputes per year that ought to be processed using their product. They also knew that each firm ought to check on the disputes using their product at least once every two months. They ended up defining two custom metrics:
Once you’ve picked your metrics and calculated your statistics - the battle isn’t over. Your job is to make it crystal clear to investors that the numbers you have on display are best in class. You probably don’t have the space to do this in a blurb, but when it comes to your deck or your voiceover you should tell VCs what good looks like for that metric. The LegalTech company I described above could say something like this:
The average law firm in our customer group has around 2 disputes a year that they could put into our platform so we monitor the number of new disputes per firm per year to make sure we are actually getting everything. Currently our average per firm is 2 so we are confident that our customers are using our software at every available opportunity.
Doing this in a slide is a bit more difficult without making it too busy. In the example below I use the tagline at the bottom to provide investors with the context needed to understand how good the metrics above are - without taking up too much space.
If your soul searching leads you to the conclusion that that retention (whether daily, weekly or monthly) is a key signal for your business, then a great way to visualise this is by using a cohort graph.
Cohort graphs track the behaviour and performance of specific user groups over time, based on shared characteristics like their sign-up date. A cohort graph would, for instance, allow a VC to easily see how well users who signed up in May were retained over the months following their sign up and compare this ‘May cohort’s’ behaviour with that of users who signed up in July.
When used for visualise retention, these graphs are a great tool because they:
Here’s an example slide:
Nothing shows customer love like them deciding to spend more money with you. If you can show that your users will consistently start spending more over time, VCs will assume that they are happy. If your business has characteristics which lend themselves to this type of revenue expansion such as:
Then make sure to check your data for proof of customers growing their spend over time.
If your business model doesn’t allow you to expand revenue with existing customers or your users simply don’t start spending more in practice, don’t sweat it, just skip this narrative.
While I have been reluctant to point to any specific stats as the holy grail in this post - NRR is the perfect metric to demonstrate this. Net Revenue Retention (NRR) is a KPI designed specifically to measure how good a company is at extracting more revenue from their existing customer base over time.
Net Revenue Retention (NRR) measures the percentage of revenue retained from existing customers over a period, after factoring in losses from churn, and gains from expansions or upsells. It's a critical metric for evaluating a business's ability to maintain and grow revenue from its current customer base. If your NRR is 120% it tells investors that if your average user starts off spending $100 in the first period, over time they will grow to spend $120. As a metric, it perfectly encapsulates how much more money the average customer comes to pay you over time.
When using this information in your materials, if your net revenue retention is over 100% that will be interpreted positively by investors and should definitely be included in your blurb or deck. If it is 110%+ I’d recommend using a cohort expansion graph in your deck or appendix to provide VCs with more granularity on just how great you are. The slide could look something like this:
Another way to show this traction narrative powerfully is to use a case study of a customer that expanded over time. Zoom in on one customer and present it as an example of what happens to revenue when everything goes right.
In your blurb you could say something like.
We have 120% net revenue retention driven by clients like BigCo who have expanded from an initial $30k p.a. contract 6 months ago to $150k p.a. today
In your deck / appendix you could represent this case study with a slide like the below:
The last three ways of proving customer love are fairly self explanatory so I will only spend a short amount of time explaining them before providing guidance on how to incorporate them in your blurbs, decks and voiceover.
Churn is where customers cancel their subscriptions with you or - in the case of transactional businesses - stop purchasing for an extended period of time. If your startup is in a position where most of your customers have had a chance to churn and few of them have done so, this is a powerful signal of customer satisfaction.
In terms of presenting churn as a metric. It’s standard to show it as a percentage - typically people show the percentage of customers they lose per month (monthly churn) or per year (annual churn). I tend to prefer annual churn because I think it is easier to get a feel for the numbers, but this is an individual preference. In any case if you have low churn - i.e. less than 10% p.a. - then make sure to drop this number into your fundraising materials.
Existing customers finding new ones for you via sharing and word of mouth is proof of customer love for self-explanatory reasons. If this is happening at a small scale - i.e. you aren’t growing like Tik Tok but are seeing some tailwinds from word of mouth - your job is to try to frame this in a way that helps investors understand that this is a substantial effect. The best way to do this is to use numbers to show its magnitude.
If possible, calculate how many new customers the average existing customer brings you. Something like the following would work well:
50% of our customers refer at least one other customer to us within a month of signing up
Where you don’t have this type of empirical data, try to point to visible signals of customer love such as unsolicited posts online where users recommend and rave about your product.
The last and most obvious way to demonstrate customer satisfaction is to simply ask users whether they love your service and if they respond positively display the answers.
Survey results and NPS scores can be used as quantitative evidence while testimonials and quotes from users can provide helpful anecdotes that you can put into your slides. Just note that VCs are less convinced by this than the other four arguments.
All three of these proofs are fairly easy to incorporate into your startup’s blurb in bullet point form as highlights (check out my guide to writing a startup blurb). Below are some example bullets:
Using these in a deck is more of a challenge as individually they aren’t substantial enough to take up a whole slide of their own. The solution is to place them in slides alongside each other or sprinkle them within the slides you have about usage frequency. It could look something like this:
Thanks for reading so far. In part two of this article - coming on the 19th Feb - I will cover how to talk about the last traction narrative in glorious detail. Complete with example slides. To make sure you don’t miss it - sign up to the newsletter here and get it right in your inbox.
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