Fundraising demand is at an all-time high — and increasingly, VCs are aiming to get an early stake in promising startups.
VC firms like Greylock Partners, Andreessen Horowitz and NFX Capital Management all recently announced new seed funds in excess of $400 million, each with the mindset that this high-risk stage of investment is connected to an even higher reward. While this increased demand should work to the founders' benefit, new data shows that expectations for the seed round are still high. In short, fundraising will not be a cakewalk.
Traction is one of the key areas of a business that VCs are very focused on in the seed round. DocSend analyzed pitch deck content and seed fundraising trends over the past year and a half, and our unique data uncovered that the traction section of seed pitch decks is one factor separating successful and unsuccessful raises.
What Is Traction at the Seed Stage?
Understand Your Target Audience
So what exactly do you need to communicate in the traction part of your deck? Traction can be a nebulous term, as it often means something very different at each stage of a company's development and can vary by industry. Let’s break down how seed founders can address this critical section of their pitch decks regardless of the development of your product or service.
Your traction slides should communicate that you have established a clear product-market fit: how well your product or service resonates in the marketplace. The traction section of your deck can take up between one to four pages depending on the stage of your product, and can include things such as letters of intent, testimonials, customer pipeline and beta feedback. It’s also important to note that seed companies will ideally indicate more than one type of notable market traction to achieve a successful raise.
How do you prove traction? Consider the traction section of your deck as the proof points of your customer development plan. Customer development is rooted in researching and understanding your market and identifying the right target audience. One of the first things to nail is what is your market size and therefore, who is your ideal customer. Hubspot is a great tool to build customer personas, and I recommend using it if you haven’t already defined your target audience or need help refining it further.
This step is critical because understanding your audience is how you understand what part of the marketplace your idea is likely to generate value — which in turn makes your company a good investment. Many times, I've seen founders try to cast a much wider net regarding who their customer is in order to show a larger market or demand, but this will come back to haunt you.
Make sure you are specific and honest with yourself about who will actually directly benefit from your idea, and refine the persona and audience so that this customer type can't live without your idea. There isn’t a magic formula for a solid traction section across every industry, and it may mean one thing for SaaS and another for fintech.
Define the Problem
Once you have an idea of who you are uniquely positioned to reach, you can use that lens to identify the specific problem your product or service solves. Your next goal should be to start understanding what makes your idea bulletproof.
The old adage in tech is to move fast and break things. Quickly testing your ideas with potential customers to collect key insights is the pathway to creating a product that investors want to back. This concept is a departure from the old days, when founders would spend years with an idea perfecting it just to find that no one wanted or understood it. In today’s fast-paced marketplace that just won’t work.
You don't always need to test by building the product; there are plenty of explorations, interviews and online communities where you can test your idea and validate it before expending unwarranted resources. Sometimes it makes sense to build something first — but not always.
Pull data from this rapid trial-and-error process, and be honest with yourself about what that data signifies. If you can weave this data into your narrative to show investors that, for example, 88 percent of respondents would be willing to switch to your product or service over a competitor’s, then you have a lot more ground to stand on than a founder who is receiving “overwhelmingly positive feedback.”
The goal isn’t to simply wow everyone who demos your product; it’s to glean insight into how it can be better and more useful for your target audience. Highlighting feedback you've received and incorporated into your strategy can also be an important step in demonstrating to investors that others have taken the time to provide you with feedback, and it also indicates that you’ve taken the time to do your research and talk to the right people.
Traction can also be articulated through important milestones. Profit and loss metrics, awards, customer testimonials or product reviews can each demonstrate to investors that your ideas are connecting to the marketplace beyond the initial testing and idea phase. These milestones are typically available at the product stage, and represent proof points that investors need to see to understand how your product is performing with users in your market.
Identify Fundraising Trends
At DocSend, our aggregated view of pitch decks from the seed stage reveals trends that outline the importance of nailing traction regardless of industry. For example, investors spent 78 percent more time on average reviewing the traction slides for companies they choose not to invest in. They are giving extra scrutiny to companies that either didn’t show enough traction or didn’t make a compelling enough case. Your job is to do this work for them through rigorous testing of your ideas beforehand.
The takeaway here is that your product-market fit should be clear and easy to understand. Investors are most likely spending more time on this section for unsuccessful decks to make sense of them, and these days time is not a commodity VCs have to spare.
First impressions matter when it comes to introducing your ideas to investors. VCs spent 3:20 reviewing a successful pitch deck, and 2:42 on unsuccessful decks. At the seed stage, investors spend nearly 40 seconds of this time reviewing the traction section of founders’ pitch decks. If investors like what they see on the initial review of your deck, that impression tends to stay with them upon subsequent visits leading to a favorable and longer viewing time. Make sure your deck reflects an understanding of the important role your traction slides play so you can make the best initial impression on investors and hook them right away.
Leverage Additional Tools
If you have a considerable amount of information you are compiling over time to demonstrate traction, you should consider a virtual data room.
For example, Lactiga, a biotech startup that is repurposing the global supply of unused human milk for novel therapeutics, has a much longer product development cycle than software companies. To reflect this longer cycle and prove short-term and long-term traction, Lactiga has built a data room with a rich set of information on its progress, including patents, research findings and media coverage.
Traction doesn’t always have to be a traditional metric. Think about what makes your company unique and get creative in identifying the different ways you can show that you are making progress — and that there’s a need in the market that no other company can fill but yours. Find different ways to show validation and think outside the box. For example, if an industry analyst isn’t covering your product category, convince them to do so or commission your own research.
There are plenty of resources at your disposal. If you are raising a Pre-Seed, Seed or Series A round, check out the DocSend Fundraising Network for an opportunity to connect with actively investing VCs and get feedback on your pitch deck. And for even more of our fundraising research check out the DocSend Startup Index.