Market traction is a measure of demonstrated profit, revenue, customers, pilot customers, or users, and their rates of change. In other words, it is cold hard proof that the market for your product is real. This measure of reality gives you the business owner, the bank and other investors, considerable assurance that you know your market and that your financial projections are sound.
Starting up a business is a risky investment, just like any other. However, it is not a passive investment. Therefore as the owner, you are likely to have your entire life and livelihood locked into your business for many years. So you want your live-in investment to pay off handsomely.
It follows that you should be seeking a premium return on your investment of time, money and expertise. If you have any second round investors involved (after first round family and friends), they will certainly be seeking a high return on investment (ROI).
Without market traction, the decision to invest requires one hell of a leap of faith by any experienced investor. Put your self in their shoes. All they have is your Business Plan underpinned only by an unproven set of assumptions. This sends the investment risk through the roof.
Without a statement of proof from the marketplace in the form of traction, investors will then focus sharply on your product and your team of people. Doubt will exist in their minds because investors know that good teams always have good traction and good products. So if your team hasn’t, it begs the question – why not?
By securing customers early, you and any potential investors are reassured that there is demand for your technology, product or service offering in the market. This substantially reduces the investment risk because you have already provided evidence that your product is in demand and that you and your team is up to the job.
So the conclusion is that a high projected ROI will not of itself produce market traction. However, the reverse is true. Early market traction is very likely to produce a high ROI for you and your investors.
Until next time