TBC: How To Show VCs Traction

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Hey there. Welcome to another episode of the back channel. In today's episode, we're going to tackle another topic that was submitted to us by founders around the world. People wanting me to jump into the ins and outs of how to show VCs traction.

So have a bunch of questions here submitted that I'll jump into right now. All right. So the first one is someone being interested to hear how I think macroeconomics end up. Effecting the targets that VCs are looking for. The person said what I've from, what I've seen, uh, both which metrics matter most and what those metrics need to hit varies by macro. Market factors.

So my general feeling on how macro economic [00:01:00] conditions impact VCs. Is it impacts how risk averse they are. When VCC that we are in good times, or they expect good times to be coming soon. They will become a little bit bolder in the way they invest. They'll invest in the future.

They'll look at less data and say, well, I think there's an opportunity. I want to go after that. And there will probably be other VCs competing for deals more heavily because of the same. Uh, exuberance around the market. And so when you see that happen, you see the requirements for marks that need to be hit.

Come down a little bit. You see it a little bit easier to convince VCs. More around story rather than actual metrics. And the opposite is true as well. When people are a little bit scared about what's going to happen. When they're unsure about the. Macroeconomic environment when they're unsure of what the presidency will do in terms of impacting their ability to make money.

Well, [00:02:00] then you'll see people pull back and require the bar in terms of metrics to be much higher. So. We don't need to get into details around that, but it does impact the requirements. And I think you'll have to take an assessment of when you're raising. What people are feeling and whether or not the mood is positive, overly positive, or overall negative. Okay. Next. At the earliest stages, sometimes people try to use a SAS playbook metric, like CAC retention, margins, et cetera. And those might not be good for certain companies.

I think this founder was obviously interested in their own because he feels like those metrics make my company feel too early. His question is how do you pull them away from those core metrics without seeming too invasive? And what do you point the mat instead? The thing that I would anchor people around is that. You have to have numbers that are actually pointing towards progress and validation of some [00:03:00] hypotheses. Now, if you're, if you're saying that you just don't have the numbers and you want to raise, you might be too early, but if you do have numbers that point to a very specific narrative that says that you are making progress. That you have validated some of your hypotheses. Well, then what you should do. is rap, the numbers that you do have in a story. You can't just give them numbers for them to interpret on their own.

Otherwise they're going to bucket it like this founder is saying into the models that they have in their head already. If you're trying to piecing to piece things together, combine a few metrics that you do have that do that, do tell a specific story then make sure you tell that story. Make sure you wrap your numbers in that story. And then I would also say, be honest with things that aren't amazing. You can be honest, but still. position it in a way that allows you to focus on the things that are actually going well, that do fit your story.

You can [00:04:00] just say that. Look. Here's some metrics that you asked about those. Aren't amazing, But tell them those. Aren't the metrics that you've been focused on. You've been focused on these because they drive towards the goals. That you're focused on. Okay. Next question. We have a small but dedicated user base.

That's very engaged. How can we showcase the quality of our traction to investors who are looking for bigger numbers? I'll kind of repeat a very similar answer, which is, it might be the case that you actually are too early. The biggest thing you can do in a situation where you're kind of early, um, is that you should. I be beating your chest and excited about the numbers that you do have with your small, but dedicated user base, be excited about them because of what they, what they tell you about your future opportunities. But don't combine that with begging for investment.

Don't say, look, look, look, I have these small but dedicated users. And they, they tell, they show us that we have this opportunity [00:05:00] in front of us. You should invest in us. Now, the best thing you can do is to share the story without forcing the investment or forcing the ask and just show them that it's going to keep moving up because then. Maybe. Today is not the time that they'll invest, but soon after if the investors do see you continue to make progress, continue to have that small, but dedicated user base grow. To make it more of a medium-sized but dedicated user base and then a large one. Along the way.

If they will have seen that progress, they will be more primed to make an investment. So the biggest thing you can do. Is tell the great story, but not go chase them and not feel desperate as you're talking to them about. Your user base. Okay. ​

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So another person asks and

when it comes to VC traction, what are some red flags [00:07:00] or pitfalls to avoid? When sharing traction data with potential investors. There are a bunch of them. I think a few that I would put out there are don't lie. Don't overinflate. A lot of times people think that they can kind of fudge the numbers and tell a good story, but more often than not. It's pretty obvious to a seasoned investor when someone is kind of stretching things a little bit too, too far, the follow-up question that a VC has around the metrics doesn't get answered the right way.

It can trigger a lot of alarm bells. And if it's not obvious, realize that those things will catch up to you later, and it doesn't feel great to have to live a lie and continue to reference back what you said. Um, if those things weren't true. Also not knowing your numbers. Cold is also a red flag. You should be able to discuss the things in detailed discuss. Conversations around those data points, how you got to them, where they're going, how you're working [00:08:00] on them.

If you aren't able to do that. That'll be a red flag that will feel very amateurish and won't get people excited to back a founder that doesn't know those things really well. Kay. Next. Uh, we're in a niche market and our traction might look a little bit different compared to more mainstream startups. How can we effectively explain this to investors who might not be familiar with our industry? I love this. There's some nuance here to understand and things that you definitely can do to have a better shot at exciting investors who don't quite know this space. So the first thing I do is say, be prepared with a story or case study. That help explain these differences that help. Give them a little bit more color and texture to react to. give them analogous situations, things that allow them to take their existing knowledge. And retrofit it into the space that you're actually in. Also try to catch these misconceptions early in, expose them.

I think [00:09:00] saying something like. You know, I know what you're thinking. You probably see more companies do this. And I thought that too, before we really got into this industry and discovered that this is actually how it behaves. So. Maybe if, you know, some of these questions are coming, you might want to get ahead of it and expose it in that manner. And then lastly, I would be prepared to have third party experts ready and willing to talk to them.

If they wanted to learn more about this industry, you can say, look, you don't have to take my word for it. This is exactly how it is, but I can connect you with X, Y, or Z. Who can talk you through this, and maybe if you have someone in your network, That knows this industry. You should definitely shoot them a note.

Ask him about this thing. If you can get them slightly interested. Without fully understanding and then give them an objective way of figuring out what it actually means. This could be really powerful because VCs love. Getting to something [00:10:00] that they realize that other VCs won't be able to see without additional work.

This might be even more exciting and turn out to be a boon for you rather than something that holds you back.

Lastly, what are some effective ways to present our month over month growth to VCs? Without over-hyping our numbers. This founder is worried about setting unrealistic expectations. Great. I think that's, that's the right perspective to have. You don't want to over, over hype your numbers in a way that are unsustainable. So, what I'd say is that, of course you hope that the current set of meetings that you're taking will lead to a term sheet. But what might help you is approaching the situation? And approaching these conversations. Expecting that maybe you're going to have to update these investors in the future in order to get them to invest.

So if you anchor yourself there, That will probably place kind of [00:11:00] a natural governor on the story that you tell or how hard you beat your chest. Around the state are the numbers. This question makes it sound like maybe they had a spiky month. And, you know, they don't know if they want to like tell that as this is the way it's going to be for the rest of the company. I would rather you say, look, we had a really great month.

We had a really, really great month. I don't expect that to happen every single month, but a core of that is going to continue to grow. And then you can actually tell the story that is a little bit, both exciting, but reasonable in terms of what's going to happen. You'll want to present it in a good light. But knowing you might have to tell a followup story down the road. We'll help you come up with the right balance between hyping, your current numbers, and also maintaining a great trajectory that in the future will show an investor that this is the right bet to make. All right. So those are my thoughts on how to present your traction to VCs in the best [00:12:00] possible way. I hope this was helpful for you all.

We're going to do a lot more of these, so submit questions online. There are email. Um, on social media and we will do our best to do more of these mailbag episodes of the back channel. Until next time. See you on the back channel.

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