On a discussion panel last week I was asked “what do investors refer to by traction”. A few days later I was asked that by another entrepreneur in another way: “How many users should I plan for before my seed round?”.
First, traction varies depending on the nature of your business. Second, it is not about a single number but rather about an overall set of business KPIs (Key Performance Indicators) and the assumptions that underline your business.
If you are a SaaS freemium based business (e.g Evernote) – traction involves primarily around conversation ratio and effective cost of acquisition.
If you are a social network – traction involves primarily around the virality co-efficient.
If you are a mobile game (e.g Angry Birds) – traction involves primarily around total downloads, retention and engagement.
If you are a user generated content service (e.g WordPress or Quora) – traction is about content generation per member and active members.
Let me give two specific examples (*):
On the one hand, if you launched a SaaS product and 6 month down the road you are acquiring customers at $50 and converting them at 2% with a $10 a month subscription, then regardless to how many users you have, to get to a $100,000 monthly revenues you’ll need to invest $2.5M in user acquisition.
On the other hand, if your mobile utility app reached top 10 on the app store in two months with 500K downloads and a 45% 60 days retention (industry average is 19%) – you probably found a product-market fit and can scale that to 2.5M downloads with a similar engagement quickly with funding.
Eventually traction is about proving your key assumptions through conversion, engagement or other relevant KPIs, being able to present KPIs that are in par or better than the industry benchmarks for a big enough sample and being able to replicate those KPIs at scale. If you were able to drive 1000 users to your service, 50% of which are still active six month down the road with only $1000, an investor might have a reason to believe you can replicate that with high probability to 500,000 users with $500K.
* To demonstrate this specific topic. Other elements need to be considered as well.