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Blogs
13 Dec

Almost every early-stage startup founder who has approached investors for funding has end up hearing the following: “I love your idea, but come back when you have more traction.” But what exactly does traction mean to investors, and how much is enough?

First, traction is evidence that your product or service has started that “hockey-stick” adoption rate which implies a large market, a valid business model and sustainable growth. Investors want evidence that your financial projections are not just a dream.

As a startup, you should first take the lead in defining what traction metrics are best for your startup. Then work on selling your results convincingly to investors. A graph that shows a hockey-stick “up and to the right” curve with at least three data points per key indicator is a great visual assist.

One or more of the following parameters are viewed by investors as traction indicators, but good entrepreneurs are often creative and define their own:

  1. Start with real sales. An investor would like to see one month of sales, and see how that compares to your projections. One customer is not traction, and beta tests with a thousand customers at no cost doesn’t count either. Your graph should show that sales have “turned upward” per projections, beyond friends and family.

  2. Free and freemium products need a solid base. If your product is free, with advertising revenue from click throughs, you need a sign-up rate and page-view rate that approaches one million page views per month.

  3. Market penetration is a must. Percentages may be difficult at this early stage, but you need to get creative about slicing and dicing the market, sector, demographic and sub-categories. For example, if your value-add is with first-time parents, show me a graph of how many 20- to 30-year-old moms signed up each week the first month.

  4. Gauge average transition sizes and sales per customers. Often enterprise customers or even consumers test a new channel by signing up for a few small transactions or trial products. If your average transaction size, sales per customer or margins have been turning up dramatically, it should mean you have gained real traction in the market.

  5. Know your customer acquisition cost. In an inverse fashion, real traction usually means that your cost to acquire a new customer will drop rapidly as your marketing kicks in and your products or services gain wider acceptance. You need to position these numbers to investors as positive, based on your domain experience, before being asked.

  6. Show acceptance by major customers and key distributors. Sometimes it’s not the numbers that indicate traction, but who you have signed up. Inking contracts with big names is a strong indication of traction. The same is true if your offering has been accepted by major distributors in your industry.

Land public statements from industry experts and group. In the enterprise world, if your offering is even included as a new contender by respected industry groups, you should claim traction. In the consumer world, groups like Consumer Reports, will give you similar credibility, if positive. Start early to work these relationships.

07 Dec

Seeking investment from an investor, private equity or venture capitalist can be tough. It’s important to research and prepare as much as possible, in order to increase your odds. And to do so, you should fully understand the process and put yourself in the investor’s shoes.

Appreciating what the investor does and how he or she screens, filters and selects future investment opportunities will allow you to understand what professional investors do, how they do it, what type of information they will seek from you, and what will make them leave with, or without, a check.

RAISE FUNDS

An investor raises funds from sources like pension and retirement funds, endowments, insurance companies, and high-net-worth individuals (HNWIs). The principal investor, or General Partner, raise capital by approaching external third parties, or Limited Partners.

Your investor will tend to prefer a small number of external or Limited Partners, each contributing a significant amount to the Fund. That’s because this normally limits the amount of time and facilitates the task for the General Partner when having to manage and report back to his pool of investors and Limited Partners.

While Limited Partners make a commitment to provide capital, that capital is not all provided at once. Rather, as the General Partner identifies and acquires portfolio companies, the General Partner calls committed capital from the Limited Partners into the Investment Fund. In an investor’s terminology, Limited Partners’ committed funds are referred to as ‘Committed Capital” and paid out fund are referred to as “Contributed Capital”.

SOURCE DEALS

Deal sourcing in the private equity industry is highly inefficient and labor intensive, despite the fact that deal origination (finding deals) is fundamental to a successful investment fund. But on the other hand, it does mean that your average successful investor is an expert at sifting through a large truckload of pebbles to find a couple of rough diamonds.

When an investor carries out due diligence of companies for potential acquisition, they will consider elements such as the company’s product or service, the company’s strategic fit within the investor’s portfolio, the company’s strategy, business model, the senior management team and their experience, the industry, the company’s financial performance, risk factors, a valuation and likely exit options and scenarios for the company. Due diligence typically intensifies in phases, with each phase sifting out unsuccessful investment opportunities and narrowing down on likely investment opportunities.

MANAGE PORTFOLIO

There are several elements to the relationship between your portfolio company and the investor that you should be aware of, and one of those is the General Partner does not want to be the CEO of your company, nor does he want to run the company on a day to day. He or she will want to take board seats, encourage you to reshuffle senior management based on skills and performance, and will provide active advice, support and introductions in respect of operations, strategy and financial management.

The General Partner will want to aggressively drive revenue, sales, operational and financial efficiencies, optimising working capital, push expansion and any other key factors that will contribute towards generating a higher share value in the next three to five years.

How involved your investor is realy depends on how big their investment is in your portfolio company. If the investor only owns a small minority stake, they probably won’t be very involved, leaving the lead investors to be most involved. However, if they own either a sizeable percentage of the equity, then they will be much more engaged in improving the company for a profitable exit down the line.

EXIT

The end goal for the investor is to exit their portfolio companies at a substantial profit. Typically, the exit occurs between three and seven years after the original investment, but it could be shorter or take longer depending on the strategic circumstances, economic cycles, availability of suitable buyers and other factors.

Most exits happen as a result of either a sale or merger of the portfolio company, an initial public offering, a redemption, and eventually a management buyout.

Now that you better understand what an investor does, it’s time to utilise them to improve your chances of gaining their investments.

The majority of experience investors tend to overlook business plans and focus in on the entrepreneur and his story, including any presentation materials, financial forecasts and an executive summary. This is logical since the majority of investors actually invest in people and teams rather than business projects or business plans. Try to obtain a face-to-face meeting with a potential investor, and keep your Business Executive Summary short, reflecting back on the four things an investor is looking for in a viable investment. By doing this, you will greatly improve your chances of catching an investor’s attention and obtaining your sought-after investment.

 

29 Nov

Great - you’ve lined up a key interview with an accelerator program. You get a chance to show off your startup and finally introduce your project to the world. However, many founders tend to falter during the interview, and end up failing to get accepted by the accelerator program - but they have no idea why.

To prevent this from happening to you, we’ve outlined seven things NOT to do during your accelerator interview, and what to do instead:

OVER TALKING

Start practicing your elevator pitch. In less than 20 seconds, you should be able to accurately explain what you do, who your target market is, and why your product/service is awesome. Remember to say your company name. And in all following questions, try to answer them as briefly as you can, in order to avoid tangents. Even more important: don’t interrupt!

BAD BODY LANGUAGE

While your speech could be saying one thing, your body could be saying something else. Practice in front of mirror beforehand and identify any nervous ticks you may have. Are you talking too fast? Jiggling your leg? Using “um” or “like” too often? Recognise them and work on diminishing those ticks as soon as possible.

LOSING CONTROL OF THE INTERVIEW

There are some tough interviewers and investors out there, so along with your simple and short elevator pitch, also come prepared with the three things you definitely want covered before the interview is over. Whether that’s how your business is different from other competitors in the space, your product’s current traction, or your team’s backgrounds - discuss beforehand and agree what three things you feel are unique selling points for the interview.

Knowing your agenda ahead of time will help ensure that you don’t get trapped in someone else’s line of questioning or that time will run out before you can really let your startup shine. If you get derailed, you can maneuver back to your Top 3.

STRANGE CO-FOUNDER DYNAMICS

First of all, unless totally necessary, don’t correct or interrupt your co-founder (unless they aren’t following tip #1). Be a team and address any tension between the two of you before heading into the interview.

Every co-founder should speak during the interview. It’s fine if one of your takes charge, but all founders should be ready to contribute. Assign question categories to each co-founder before the interview so that they’re prepared, and ready to speak up. And if any of you have previous exits, great backgrounds at amazing companies, or any other amazing feats, make sure you highlight them.

UNABLE TO STAND OUT

Differentiation is key. If you are entering a crowded space, or have robust competition, this is Concern #1 on every interviewer’s mind. But there’s a reason you started your company - even if you don’t realise it or not. As an early stage company, it’s hard to know what your “moat” or “secret sauce” is, but you should avoid describing your company’s advantage in terms of features, slight advantages, or user experience. Instead, describe in simple language, the value that your customers and users get from your service. describe the vision of what you are building towards.

NOT TELLING A STORY

On a macro-level, this applies to your company: what is genuinely interesting about your story as a product, as a team, in your space? Have you learned anything? Why are you doing this? On a micro-level, this applies to how you will talk about your traction and value proposition: do you have a great customer or user story? How did you and your co-founders meet?

Come prepared with date, results, or a story that will surprise those interviewing you. And don’t forget rule #1 - all stories should be told in under a minute.

BAD ENERGY

Understand that your interviewers will be talking to many companies in one day, one after another, for hours. They can easily blur together and you don’t want to become part of the blur. If you have low, uninspiring energy, your traction better be unbelievable to make up for it.

There’s nothing more inspiring than a founder who is passionate about what they are building, their mission, their team, their customers. Pump yourself up with music, read journal entries from the day you quit your job to become an entrepreneur - do whatever it takes to bring out your most authentic, alive self to the interview.



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