You have a new idea that you want to get across to the higher ups in your company. You need to come across with not only proof of concept, but proof that your idea is indeed profitable. Furthermore, your idea needs to be consistently profitable in the future and not need too much maintenance to maintain profitability. How can you convince your boss, or rather, your investor to spend their dollars on your idea?
All entrepreneurs, company owners, and investors are seeking the holy grail of investment: traction. Traction is a source of influence, a measure of success, and, most importantly, the golden ticket to favorable capital raises. The definition of traction is market uptake. That is, traction refers to the customer progress rather than company development. As disciples of the lean startup approach, we live and breathe traction. The new buzz term Micro-Traction is a way in which you can prove yourself early to investors and reduce the risks when building a larger network of customers.
Think like a VC
Take a break for a second from your normal life and think like a Venture Capitalist. Venture capitalists are investors who either provide capital for a start up ventures or support small companies that wish to grow but may not have the means to. What are their goals? Members of the VC community are looking to make money. They need to assume a lot of risk in a calculated manner. To do this, they use both metrics AND soft data points to help them determine where to invest. Experienced VCs are comfortable with saying “no.” They hear many terrible ideas on a daily basis by people who cannot deliver, and they must stay honest to the data to maximize profit.
After thinking like a VC, get back to your normal life. Now you realize that it is your priority to gain trust and credibility as fast as possible.
The VC Rule of Thumb
Bear in mind; investors will actively invest when the company/platform has reached 1M Users/ $1M Gross Monthly Income (GMI), and they acknowledge that the platform will scale. Therefore, solely reaching 1M Users/$1M of GMI is NOT sufficient unless it is paired with platform scalability. To reiterate, it is not enough to have attained $1M; you must also show that the road taken to reach that amount did not have frequent pitfalls and that the path ahead looks stable as well.
Traction is measurable through Quantitative Market Demand: the act of determining that there is indeed enough happening in the market place. Traction has two important aspects: It proves demand and it scales.
What is a ‘Scalable’ method?
Scalable methods display slow but consistent rises in growth and are often high-risk practices. Non-Scalable methods show short, sharp, and even erratic developments in growth; these are typically low-risk methods.
Some examples of Non-Scalable practices include temporary user/employee incentives, social media updates, blogging, and PR ‘stunts’ because they exemplify short-term profit instead of long-term. These Non-Scalable practices increase traffic, but the profit is only temporary. The attention you receive does not always continue to rise. Think of a Facebook update. A bunch of people may see it, and it will get a natural boost in site traffic for its first week. But in the subsequent week, however, the post will probably move down the timeline, thus reducing the site traffic.
True Scaling practices
Include Long Term Incentives/Rewards, Paid Acquisition (Advertisements, Paid Affiliates, etc.), Virality (Through Social Media), SEO (Search Engine Optimization), and Sales. We consider something to be scaled when it is receiving general customer love of the product.
- Micro-Traction is a mini campaign to prove scalability. When approaching an investor, you should remember that they are not interested in random surges of growth.
- An investor wants to see continuous growth. They like LINES with precise trajectories, not aimless DOTS.
- With Micro-Traction, we analyze the performance of a platform within a small time frame (typically 2-5 months).
- The goal is to display a continuous growth of 5% to 10%, week-over-week, based on a small initial revenue. This calms the investor’s concern of not reaching the ‘rule of thumb’ numbers [1M Users/ $1M GMI]. At this point, the investor is looking purely at the scalability aspect of the product instead of the Monthly Recurring Revenue.
It is important to show as much evidence of traction as possible to prove the viability of your concept, app, or product. Remember, Non-Scaling practices are necessary for initial cash income / new users, but they are not long-term practices.
If you want to read more about Micro-Traction and Scaling, check out http://www.erickoester.com/
Still have more questions about how Micro-Traction and how it can verify your app’s success? Email us at firstname.lastname@example.org or leave us a comment!