How do I evaluate a startup’s traction?
Not all startups have traction prior to raising capital. In these cases, accurately assessing product-market fit can be nearly impossible, although one can attempt to assess what it might be through speaking through the startup’s product/service with prospective customers and users. However, what people say and what people do can be two different things. There is also the problem that someone’s idea of what something is and the reality of what is delivered can be two different things.
Because of this, some startup investors (including FundersClub) prefer to see a minimum level of traction as evidence of early product-market fit prior to investing. Evaluating early traction will vary based on the category of startup, for example one framework of parameters to seek are the following:
Consumer software - several periods of consistently growing key metrics, usually high user engagement and consistent user growth, possibly also revenue growth (e.g. if marketplace or eCommerce model)
Enterprise, targeting small and medium businesses (SMBs) - consistently growing key metrics, probably revenue growth, possibly high user engagement and user growth
Enterprise, targeting large enterprises - at least 1 or more contracts with a large enterprise and/or multiple LOIs with large enterprises ascribing significant value to company’s product/service, and positive references with the enterprises
Consumer hardware - significant paid presales of a product that resonates with reality (around delivery date, manufacturability, etc)
Enterprise hardware - at least 1 or more contracts with a large enterprise and/or multiple LOIs with large enterprises ascribing significant value to company’s product/service, and positive references with the enterprises