Call us when you have traction

Editor’s note: This is a guest post by Kevin Swan (LinkedIn, @kevin_swan). Kevin has cut his chops doing product management at Nexopia.com before becoming it’s CEO. He moved to the dark side with Cardinal Venture Partners and is now a Principal at iNovia Capital. Thankfully he is an MBA dropout and that’s why we like him. Follow him on Twitter @kevin_swan or OnceABeekeeper.com. This post was originally published on January 12, 2012 on OnceABeekeeper.com.

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This is probably one of the most common phrases you hear from venture capitalists. It has become the de facto phrase from an investor that really isn’t interested in your startup, but wants to let you down easy. I make a conscious effort to avoid taking this backdoor, but I know that I have been guilty of it as well.

Recently, I was digging into a company and providing the entrepreneur with some feedback. After sharing a few thoughts I used the traction excuse – in this case it was legit. We liked the space, the entrepreneur and what he had accomplished so far. However, he didn’t have enough traction for it to be attractive as an investment yet. He quickly emailed me back with the question – “What do you mean by traction, specifically?”

Then it hit me – I have never actually been asked that! I think that investors are so used to using the term that they never put any quantifiable information behind it. I thought that it would be a good exercise to provide a quick overview of what traction looks like. Note that what follows is completely a generalization and their are many other factors that come into play in an investment decision. Also, traction looks very different depending on the type of company you are building and the market you are targeting. I will tackle three common ones in this post and try to estimate some figures that would be required for a Series A investment.

In consumer internet or mobile startups that does not have a transactional revenue model attached to it traction is all about the audience. The bar for what traction looks like in these companies has been significantly raised from 5-7 years ago when everyone was starting social networking and digital media companies. To be compelling to a VC you will need to show early signs of growth, 30%-50%+ month-over-month (MoM), and start to build an active user base of 100K+. Some VCs I have talked to say not to get your hopes up for a Series A investment unless you are around the 1,000,000 mark.

Lets take a look at one of the hottest companies in this space that just recently closed a round of financing, Pinterest. Don’t focus so much on the incredible growth they have recently experienced, but rather notice that they had it even when their user base was small.

A SaaS company will not experience the same kind of growth as a consumer internet company. It is, however, generally able to produce revenues from day one. The definition of traction for these companies looks more at the signs (or specifically, data) that the company is moving to a scalable and profitable model. In simple terms, the separation between the cost of customer acquisition (CCA) and the lifetime value of a customer (LTV) is shrinking and repeatable. This combined with a growth of 10%-30% MoM shows signs of traction.

An e-commerce company takes a longer time to show signs of traction that is attractive to investors. This stems from the fact that it requires a considerable scale to make an e-commerce company profitable in light of low margins and expensive infrastructure. The same key performance indicators (KPIs) apply – CCA and LTV. However, unlike SaaS companies there are going to be considerable capital and fixed costs in an e-commerce company to consider. In general, growth rates of 10%-30% MoM and a 12-month run rate of over $1 million are signs that the company has traction.

I want to re-iterate that this is a generalization and their are many other factors that come into play in an investment decision. However, I wanted to try and provide some quantitative numbers for context.

Another question that I know will come up is in relation to what kind of traction is required for seed/angel investments. That is a whole other post, but I will share a great comment from my colleague Karam. While a Series A is all about traction, seed investment is all about momentum. This momentum can take a lot of forms – traffic, sales, product development, recruitment of a team or even investors who have already stepped up to the plate.

Don’t wait until you have hit these metrics to reach out to investors either. In every case, an investment starts with a relationship that has to be built and investors want to see lines not dots. If you are moving in the right the direction and building traction make sure you reach out!

When Does a Startup Stop Being a Startup?

Editor’s note: This is a cross post from Mark Evans Tech written by Mark Evans of ME Consulting. Follow him on Twitter @markevans or MarkEvansTech.com. This post was originally published in January 11, 2012 on MarkEvansTech.com.

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This may be a question of semantics but here’s a question for you: When does a startup stop being a startup? At what point does a startup become a small company or a plain and simple company?

It’s an interesting question because it’s easy – and probably lazy – to describe less established high-tech companies as startups. As well, the word “startup” is lot sexier and appealing than “small business”.

So how should a startup be defined? Does it have to do with the evolution and life-cycle of its product? Is it the number of employees? Is it linked to revenue? Does it have to do with how long a company has been around? Can a startup have 10s of thousands of customers even if none of them actually pay for a service?

For example, is Freshbooks a startup despite the fact it has been around for several years, it has 80 employees and sales of about $10-million give or take a few million dollars? It’s sometimes called a startup but it’s more accurate to call it a small company.

For the sake of argument, here are some possible criteria for startups:

Less than 20 employees. Once you get more than this number of employees, a company starts to have “departments”
A product still in development (pre-launch) or in market as a beta for less than six months.
No sales or sales of less than $1-million, which means it’s a mini-business as opposed to a small business.
It’s less than a year old, although there are companies that do go from zero to sixty in less than 364 days.
No customers or only a handful of customers, who may or may not be significant clients dollars-wise.
It has raised more than $5-million in venture capital. With this kind of cash, a company can support having a large team.

For more thoughts, check out this Q&A on Quora, as well as a recent blog post on Business Insider.

It’s people, people!

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How do I know that emerging technology is still booming? It is incredibly difficult and competitive to recruit, hire and retain people with startup experience across Canada. Just look at the number of jobs posted on the StartupNorth Job postings:

Customer Service Hero, Wave Accounting
Front End Developer, Maintenance Assistant
City Ambassador aka Sales Lead, Shopcastr
Lead Developer (Ruby on Rails), Qwalify Inc.
Web Developer, GoInstant
View all job postings »

The number one budget item for startups is headcount. For most companies, the people costs far exceed the costs associated with hosting, etc. I don’t know about you but we’re not designing our own servers or opening data centers near the Arctic to reduce the cost of computing and power consumption. It means that the people are the biggest cost for a startup as they grow.

This is different during the initial creation of many of the startups in the bootstrapping phase. We’ve seen a lot of startups get to Minimum Viable Product and start the process of finding a scaleable business model keeping their headcount costs low or close to zero. You might infer that the experience at YCombinator or TechStars or 500Startups is designed to give entrepreneurs the bare minimum of capital and put them in a focused, competitive environment with a deadline (Demo Day) to do the customer development and build the connections necessary for the next stage. Upon exit, many of these companies raise a significant amount of capital. Have you asked yourself why?

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It’s to hire the best people. And it turns out that hiring the best people is not something that can be easily solved with a job posting, or a tweet, or free iPad. Recruiting is Hard! And at startups, it can be difficult to step away from fund raising, product development and customer engagement to focus on the thing that can make or break your business. Ben Yoskovitz wrote a great summary post of his efforts to Recruit and Hire Top People for a Startup that every founder should read:

The war for talent across Canada is just beginning. During my time at VeloCity at UWaterloo, I was impressed at the number of US companies and startups that were actively recruiting on campus. And the established companies aren’t alone, we have seen an increase in the amount of US investments (looking at you GoInstant, Vidyard, TribeHR, Kik, Playerize, Enflick, Shopify, Hootsuite, A Thinking Ape, and others). This will undoubtedly lead to increasing salaries (see @byosko’s # 4 prediction for 2012 in Montreal). It doesn’t even take into consider the continuing recruiting efforts that companies like Rypple, Radian6, Dayforce. For startups, we are going to need to improve our culture and game to keep talent. And getting your startup to a point to raise enough money to pay competitive salaries is going to be the baseline to play in 2012.

If you are designer, marketer or developer and you are curious at who is hiring or if you want an introduction, drop me a note with a resume (david at davidcrow dot ca) and I’ll do my best to match you with companies I know are looking.