This is a guest post by Alan Gleeson is the General Manager of Palo Alto Software, Ltd, creators of Business Plan Pro. He holds an MBA from Oxford University and an MSc from University College, Cork, Ireland.
While the phrase ‘traction’ has typically been associated with tyres, friction and slippery driving conditions, its use is increasingly common in entrepreneurship and Venture Capital circles. This article explores what it means and why it is an important concept for entrepreneurs to be familiar with.
The Entrepreneurship Journey
The typical entrepreneurship journey moves through various stages i.e. from idea conception to business plan to execution and then to growth (or failure). For most entrepreneurs the journey is challenging not least because they need to perform many activities simultaneously while always being conscious that they may run out of money in the very near future. While sound planning can help with the former, early stage investment is often used to fund the latter i.e. the investment gap and it is at this point that the concept of traction often comes up.
Defining Traction
Investors need to carefully balance risk and return and will be very familiar with the harsh realities of early stage investment i.e. that most start-ups fail. As a result they will be trawling through the evidence you provide (often in the form of a business plan) to assess whether or not they perceive a commercially viable business opportunity exists, in which they should invest.
For the most part they will need to take a leap of faith with early stage investments, relying on the assumptions contained within your business plan to help them decide whether or not to invest (and if yes, on what terms). Traction is essentially momentum and progress as best exemplified by customer adaption and sales. And if you, the entrepreneur, can demonstrate that you have gained some traction you are reducing the risk for them, as factual evidence will always trump assumptions, projections and wild conjecture.
Evidence of Demand
The most persuasive evidence you can provide that your business is worth investing in is ‘evidence of demand’. Clearly if this demand is translated into sales you have irrefutable evidence that the start-up has traction. The greater the sales the greater the proof.
In terms of the ‘traction hierarchy’, active users and letters of intent probably fall into the next tier below real sales, finally followed by viewer numbers (on your website). While growing visitor numbers to a website was once a good barometer of the potential of a business, it is no longer considered a valuable proxy. These visitors have to convert to sales and hence once again the focus returns to the one piece of evidence that trumps all others – real sales.
Why is all of this important?
One of the problems entrepreneurs face is that they can often focus on the wrong things. There is so much to do and so little time. For example, entrepreneurs often have an excessive product orientation, focusing predominantly on product design without really addressing wider concepts such as addressable market size, routes to market, customer acquisition costs and sales forecasts etc. Business plans can really help ensure entrepreneurs retain focus on the right activities as they force entrepreneurs to take a holistic view of the opportunity. However, not all entrepreneurs embrace the principles of business planning and even those that do may not have a strong focus on ensuring all activities are strongly correlated with the core aim of gaining traction.
So what should they focus on?
As mentioned, entrepreneurs need to conclusively demonstrate that there is strong evidence of demand. They need to concentrate efforts on the area of product /market fit, a concept Steve Blank has explored in detail in his book The Four Stages of the Epiphany. Blank states that the primary role of an entrepreneur is to iterate and test assumptions and hypotheses they have made with regard to customer behaviour and demand until they find a commercially viable business model.
‘Your startup is essentially an organization built to search for a repeatable and scalable business model’
In other words Blank is arguing that your primary role as an entrepreneur is to ensure that there is a good fit between the product and the market and if there is, you can evidence traction from which you can then confidently scale your business.
Struggling to gain traction?
There are numerous reasons you may not be gaining traction with lack of product/brand awareness being one of the most common problems entrepreneurs face. Nowadays, competition is increasingly intense and it has shifted to what is essentially pan-industry competition for people’s attention (rather than merely competition within a market). This issue is particularly of relevance to Internet based start-up’s who incorrectly assume the old adage ‘if I build it they will come’ will apply. One reason you may be struggling to gain traction is simply because people may not be aware of your product, and if this is the case you need to intensify your marketing efforts to gain more attention.
Similarly you may simply find that your product or service offering does not meet your customer’s needs, or there may be switching costs preventing them from trialling it. The easiest way to identify potential reasons for a lack of traction is by talking to prospects and customers.
How do you get traction?
The easiest way to gain traction is to produce something fantastic that solves a problem for a target group, and to back it up with effective marketing to that audience. If your solution to their problem is compelling you are likely to gain traction. Gabriel Weinberg has written a nice post covering various ways a group of entrepreneurs he interviews gained traction. Essentially he is describing a range of marketing activities his interviewees have used to ‘get the word out’ about their product or service. Of course underpinning all of this is the fact that the message relates to a core product or service that clearly addresses a market need. One strategy is to initially focus on generating awareness amongst key influencers (often media) who are often good conduits to your target market. Similarly you can focus on creating awareness amongst a group known as ‘early adopters’ who are individuals willing to test new products and are not averse to risk. A good marketing strategy will ensure that all bases are covered when seeking to generate brand awareness.
What is enough traction?
The amount of traction required depends on the risk appetite of the investor. The more you have though the greater your ability to attract diverse investors and dictate terms when seeking external investment. Choosing between competing term sheets is a problem most entrepreneurs would love to have. Venture capitalist Mark Peter Davis indicates what most investors want in his blog post;
“..investors want to know that a company can repeatedly acquire customers for $X and generate more than $X in gross profit from each customer.”
However, in relation to his view on what enough traction is, he goes on to say;
“In sum, there are no hard-and-fast rules, but when an investor suggests that you obtain more traction it’s because they still need to be convinced that your customers are going to adopt en masse.”
While there is no definitive answer, sales that are growing monthly without a commensurate increase in expenses while you are essentially in stealth mode is a pretty strong signal.
What to do when you do not have enough traction?
For me, modest user adaption cannot be excused because you are still in beta. As stated previously, customer acquisition is the clearest signal that you are gaining traction. If you are not seeing growth it may be that you need to revisit the product/market fit, invest more in marketing, and undertake some additional market research or some competitive analysis. The last thing you should to is continue along the same path without understanding why adaption rates are not at the level they need to be.
Perhaps you need to pivot what you are doing or consider a Plan B? PayPal is a great example of one such company that went through numerous iterations before settling on an email payment system. As founder Reid Hoffman described recently;
‘Over the years PayPal has made multiple significant pivots. The company started as a mobile encryption platform. Then it was a mobile payments company. Next PayPal was a combination mobile and Web site payments company. Finally PayPal became an email payments company. Each pivot over the life of the company was the result of rethinking the business but maintaining the vision. The focus was always to become a payments operating system; but the nature of the operating system changed multiple times.’
If after pivoting you are still struggling to gain traction you need to put some solid milestones in place, which need to be met if you are to proceed with your venture.
The lessons are clear, gaining traction is the strongest indicator as to whether you have a commercially viable business opportunity to explore. If you do not have significant traction you need to redouble your marketing efforts, consider a Plan B or set some tangible milestones which you need to achieve to justify continuation of your business.