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Understanding The Traction Metrics That Investors Consider In Startup

Part of preparing for fundraising is getting all the traction metrics that investors, particularly venture capitalists, might want to know about. With its ability to make or break a fundraising process, this can be nerve-wracking even for the more seasoned founders amongst us.

There seem to be plenty of factors that one would like to show to help investors make their decisions, but which one of those actually matters?

Things get even more complicated when we consider the fact that different investors might consider different traction metrics, depending on the verticals that the startup is working on. For example, startups working in the deep tech sector might also need to show proof of concept in their fundraising process while startups in the B2B sectors might need to show their CAC payback period.

But there are principles that are applicable for almost every early stage startup.

In this article, we will look at the different traction metrics that investors would typically consider in an early stage startup. There are three factors that we will explore: market opportunity, proven traction, and other deciding factors.

Market opportunity

Part of the most common reasons why startups fail includes the lack of product-market fit –a situation where startups are building products that the market does not need. This is why market opportunity will be one of the top traction metrics that investors will look at because strong returns can only come from equally strong market shares.

Tech ecosystem enabler RocketSpace details these points that investors will consider when it comes to measuring market opportunity.

Total Available Market (TAM)
TAM typically refers to the total revenue of the market that a startup is operating in, usually calculated per geographical location over a five year period. There are different ways that startups can calculate it, including an estimation of how much market it could gain if there were no competitors or an estimation of market size that could theoretically be served with a specific product or service.

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Despite its importance, RocketSpace warns against putting too much emphasis on TAM as it does not always translate to high demand.

Market Share
Instead focusing too heavily on TAM, RocketSpace recommends founders talk about the startup’s potential market share or sales measured as a percentage of an industry’s total revenue. For example, if founders predict sales to go up to US$200 million in the fifth year of business, they need to be able to explain why this number is achievable.

Industry Growth
You may notice that each year, there is always a vertical that becomes more popular than the rest. For example, earlier in 2021, there was a great surge in food delivery and cloud kitchen startups, but come Q4 2021, everybody was all about metaverse and Web3. This is also one thing that investors are looking at.

International Expansion
For some markets, international expansion is a more crucial factor to consider as it enables startups to tap into a bigger market. But if founders do not see international expansion as part of their agenda in the future, then it is more important to be honest about it.

Proven traction

There was no question that this will be the most important part to show a potential investor. All of the founders’ claim in the previous segment will need to be backed by data that includes profitability, revenues, number of active users, number of registered users, amount of engagement, partnerships or clients achieved, and amount of traffic generated.

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But how about startups that are still in the pre-revenue stage? Is there any difference in how they should present this aspect?

Quake Capital explains:

“For revenue-generating businesses, some examples of metrics are sales and revenue, units sold, revenue growth, and profit margins. For example, Quake would love to see growing MRR and ARR (monthly and annual recurring revenue). However, there is no perfect number. Rather, we look to see that revenues come from your business model, because ultimately that is proof of product-market fit.”

“For pre-revenue businesses, metrics may include the number of users or clients of your product or service, the number of engaged users (for example, an app may have 50,000 downloads but only 10 users per day, which isn’t great). Ideally, the number of engaged users should be close to the number of total users. We like seeing high retention and low churn. Retention is defined as the number of users or subscribers who continue using your product or service while churn is the number of users or subscribers who stop using your product or service after a certain time period.”

Team strength

There is one factor that investors will always look at: the strength of the team behind the startup. This is strongly related to the matter of trust as well as resilience; if the startup is being helmed by a strong team of founders, even when the worst happens, they will come up stronger than before.

What kind of “strong team” do investors look at? The key here is credentials and skills. But most importantly, it is all about the team’s passion in the business.

Source: e27

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