Traction, revenue, and the importance of sustained growth for startups looking for funding
Traction trumps everything, right?
If you’re a startup founder, no doubt you have had this statement drummed into you. You probably believe that if you can show potential investors revenue, active users, registered users, website traffic, and demonstrate momentum in the market adoption of your product, then you’re ahead of the game and on the path to success.
There’s no question that traction is widely portrayed as the most important factor to focus on once a startup passes through its minimum viable product (MVP) pre-revenue stage and crosses the starting line to begin taking revenue or signing up users.
The problem is that, in reality, traction is not everything. In fact, especially to an investor, your history of growth is equally important and can even make or break a prospective investment deal.
Growth trumps traction
In our venture fund deal review meetings, we look at least 30 pitch decks per week, and spend a great deal of time focusing on the parts of each deck that depict business momentum.
Of course, we start by making sure we understand what the startup actually does – but immediately after that we zone in on business revenue, in particular the month-on-month (MOM) revenue over previous months or years. If these figures don’t form part of the pitch deck, it is usually an indication that either the business is still pre-revenue or the founders are trying to hide their traction results.
For us, sustainable MOM growth is essential, with 10 percent usually the lowest amount we like to see. Anything north of 20 percent MOM growth is something that really excites us.
Flat growth can be a red flag to investors
At Right Click Capital, we see a large number of start-ups with flat or very little growth over time. Unfortunately for those founders hoping to raise more capital, sustainable growth is the secret weapon, and essential if they are to attract investors. Flat growth can make capital-raising both time consuming and extremely frustrating or – worse still – unsuccessful.
Investors start to question why your business is taking so long to grow and, ultimately, whether your business has really found the right product/market fit. That’s what I mean when I say that growth history could be your business’ biggest enemy when you are trying to raise capital. Of course, some lean months aren’t necessarily the death knell for your business. Professional investors understand that you can’t expect to power ahead every quarter, and that there will be some lulls – they just don’t want those lulls to continue indefinitely.
So how much flat growth is ok before it becomes a serious problem? In general, a period of flat growth that exceeds six months will begin to worry investors.
Turning around a history of flat growth
That said, while six months may be the usual number, it’s not a hard and fast rule. In fact, the most important message I can give to business founders is that it is never too late to focus on turning growth around. And flat growth may not be important if it can be balanced by recent evidence of strong growth.
Case study one:
Oneflare: Small change becomes catalyst for sustained growth
As an early investor in Oneflare, Australia’s fastest-growing home services marketplace, I saw first-hand how a change in growth can increase a startup’s fortunes.
The business began in early 2012, and for most of that year growth was linear as the business searched for its growth drivers. The founders also spent most of the year searching for seed investors, only to fail.
In December of 2012, Oneflare made a slight change to its business model which ignited strong MOM growth. In January 2013, the growth rate was 400 percent that of December 2012, with the trajectory rising sharply each month going forward. In April 2013, the founders presented their business to four potential angels, and three decided to invest on the spot.
Oneflare is a good example of a startup crossing the line from pre-revenue to post-revenue growth. It also shows how crucial it can be for a startup to demonstrate MOM growth to attract investment. Four months of sustainable, strong growth after 12 months of very flat growth was enough to convince investors fairly effortlessly that the business had great potential and was well on its way.
On the other hand, if a business has had flat growth for numerous years, it will find it more and more difficult to convince investors to ignore its poor growth history. This was particularly true for a tech business that I had the opportunity to mentor, and which had been operating for six years.
After several years, the business was still struggling to find product/market fit, and had invested resources into literally hundreds of investor meetings over its lifetime. Revenues were healthy enough to keep the operations lean at approximately break-even, but had been consistently low for several years.
On the surface, the business looked impressive – a global marketplace on the supply side, employees in multiple countries, numerous awards, and high-profile customers. However, every investor who looked at the revenue history of the business asked the same question: “Explain to me how the business will grow much faster in the future, if you receive my investment?”
The company tried to explain history away with the answer that it was only its desperate shortage of cash which had prevented it from pursuing various strategic initiatives in order to achieve growth. But this explanation just didn’t cut it with investors. For this business, it was back to the drawing board with a major pivot around which customer segment to focus on.
The goal was simple: for a sixteen-week period the company had to be able to show that the new strategy resulted in MOM growth. This is probably the shortest amount of time required to convince an investor that the history of flat-line growth can be ignored, and that the business has “cracked it”.
In the end, the sixteen-week period was largely fruitful and the company was able to post sustainable growth – and convince investors that it had a viable future.
It’s a good example of the fact that even a business which has had flat growth for many years can still improve its growth history and prospects.
Less than stellar growth? Focus on growth first, capital raising second
From an investor viewpoint, if your business is caught in a state of flat-line growth then the best strategy move you can make is to put your capital-raising plans temporarily on hold and begin experimenting to find a growth engine for the business.
You need growth to build a new history; a history showing double-digit growth for at least the last four months. And if you can demonstrate this to potential investors, I guarantee they will have short memories of your previous months or years of flat-line growth. Which in turn means you’ll have a strong chance of getting the capital you need to continue feeding your growth.
Garry Visontay is a partner at venture capital firm Right Click Capital, investors in high-growth technology businesses. He curates a list of resources for Australian founders and tech investors at visontay.com.