Outlier to project founders: How to prove your product has traction?

Written by: Haya al Husry, Project Manager at Outlier Ventures

Compiled by: 0x11, Foresight News

Market traction refers to the progress of a startup and its overall momentum, which is an important factor for potential investors to consider (Translator's note: Traction literally means "pulling force," but when used in the context of startups, it indicates the increasing popularity of the company's products or services). This is because the primary reason startups fail is misunderstanding market demand, with over one-third of startups citing this as the main reason for their failure. In the current environment, venture capital firms are more discerning, and they want to see evidence of market demand for the project.

The reality is harsh: up to 90% of startups fail. To assess whether a business has the potential for success, we propose two key questions about traction. The first is: who else, besides the founding team, cares about this idea? The second question is: can this team succeed? While smart people can have brilliant ideas, there is often a significant gap between theory and execution.

This is where traction comes from. Are your customers interested in the product you are building? Can you convert these customers? Early traction is the most direct evidence. However, early traction is harder to understand. Once a business starts operating, it becomes easier to measure its momentum using metrics like revenue data. Before generating revenue, finding traction means looking for specific metrics or signals.

Key Methods to Prove Traction

Traction metrics vary by market or business type. When it comes to B2B, there are three ways to demonstrate momentum to investors. Each of these metrics indicates to investors or stakeholders that there are people interested in seeing the business turn an idea into reality.

While there are more metrics, some of the most typical and powerful indicators are:

1. Domain experts willing to serve as advisors, eager to invest time and money in the startup because they see potential;
2. Letters of intent from potential customers indicating they plan to purchase or collaborate with the business;
3. A potential customer running a pilot program, indicating that market demand is already evident and urgent enough to justify the preliminary trial.

If none of the above are possible, there are other ways to prove an idea is viable. For example, having deep expertise when it comes to potential customers or client groups can be helpful. If the founders can demonstrate their personal experience in a specific field, it will benefit them; if not, obtaining an advisor with industry expertise is also beneficial. In fact, if the founding team lacks relevant expertise, it is crucial to secure an advisor with domain knowledge, which is a very key signal for investors.

Since founders often need two to three times the expected time to validate their business model, more momentum means a shorter path to profitability. To this end, a key question investors try to answer is: can this team close deals with major clients? This needs to be proven through action, especially in B2B businesses.

For B2C companies, an effective way to measure traction is to conduct small beta tests with users or build a community that follows the business and its progress. The more competitive the startup landscape, the more important it is to showcase traction as a differentiating factor. Startups without competition need to focus on concept validation, while those in highly competitive markets need to demonstrate more tangible traction and early users.

What Matters Most to Investors Regarding Traction?

In addition to demonstrating clear market demand and a clear path to profitability, the key reason investors care about traction is that they are not the target market for all business ideas. For example, we were recently pitched by a founder looking to collaborate with musicians. We needed to validate or prove that there would be an audience, and since we are not musicians, we could not assess whether this was a necessary idea.

For this reason, we asked the founder to secure at least 20 musicians to join the platform. It turned out that without enough artists on board, we could not substantiate support for this concept. After all, while this may sound like pessimism, flawed business models are the reason nearly one-fifth of new enterprises fail, and the primary way to predict this is by observing actual market demand.

Another example is when we were recently pitched by a regenerative finance company that showed greater appeal. This particular startup received letters of intent from various business clients and pointed out many programs they were running between the first and second applications. The enthusiasm of the customers was enough to instill confidence in investors regarding the product.

This is why having an engaged community is beneficial, especially when seeking investment. If you have a B2C company, an engaged community can be a great way to showcase traction. Sometimes, even a sign-up sheet can play a significant role and provide an initial list of potential beta testers for the startup. While a startup may have the greatest product in the world, if no one is interested in it; if no one has heard of it and there is no existing community of testers or early adopters, it will be challenging to make progress.

The Best Time to Approach Investors

Companies that are in the "too early" stage may not benefit from our camp because they may not yet understand what they hope to gain from it. The best time to approach investors is when you clearly know who your target market is; this is the best time to leverage the investor network.

Additionally, Outlier Ventures is a very fast-paced project. We provide you with consulting services from internal experts who have helped launch over 100 startups and networks worth billions of dollars. In short, a lot happens in the three months we work with a startup, leaving little time to determine if the product fits the market.

However, it is important to note that many founders will also adjust their plans. Saying, "Look, if we sell the product this way or develop this feature more, it might be stickier," is 100% acceptable and encouraged. However, before this, founders should have a firm grasp of how the product they are developing meets market demand.

In other words, the foundation should already be in place before you approach investors like Outlier Ventures. Even if the product is not in its best form, there should already be some validated product-market fit. Ideally, we want you to grow from one customer to five customers, rather than spending three months trying to reach one customer.

This means that the founding team should keep in mind that for most investors, traction is not "optional" during the process of achieving product-market fit. At this stage, traction is a must-have. In the long run, traction can help you measure whether the idea meets real market demand. While it is easy to be attracted by the potential of an idea, execution is everything, and it starts with discovering execution capability and demonstrating early traction.

We often find founders caught in a loop: "I need funding, but I can't get funding until I have traction, and I can't get traction until I get funding." I have offered many suggestions on how to gain early traction without needing a lot of funding.

One last thing is to build a product to showcase your skills without much funding: one way is to have a Minimum Viable Product (MVP), which is especially effective when the product is not highly technical. When a product is highly technical, having a capable and experienced CTO becomes particularly important, signaling to investors that even if the product cannot be launched now, it can be launched in the future.