Early-stage entrepreneurs need marketplace traction to raise capital. And capital to generate traction. Here’s how to get out of this frustrating cycle.
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It was an unusually sunny early spring afternoon in San Francisco’s SOMA neighborhood. I was meeting with the founders of a new company, fresh out of Y Combinator’s latest cohort, and they were pitching me on investing in and advising their business. They were excited and pumped for the future.
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“We are creating a marketplace for mineral rights and options,” they told me. This marketplace they envisioned? It would enable landowners to sell the rights to mine for minerals or even oil on their property to prospectors and others.
“Stuck in a pen and paper dynamic, this market is worth at least $50 billion,” one of the eager young founders said. “The standard to get to traction — at scale — is extremely low.”
Sitting on the other side of the table and seeking to provide some advice to these entrepreneurs, I was struck by one fact: Their business had no traction or growth. And I responded accordingly: “You don’t have any real traction yet do you?” I commented.
“No, not really,” the founder replied. “But we do have a massive market opportunity, incredibly strong tailwinds and the team to execute.”
He had a point: These founders may have fallen into the “traction trap” in investor pitches, yet they had not only survived but thrived.
Unfortunately, the same cannot be said for many other founders.
One of the most common reasons why investors say “no” to early-stage entrepreneurs is that they lack traction or growth as evidence that consumers want their product. This is often frustrating for entrepreneurs as it presents them with a “Catch 22” situation.
Obviously, they need traction to raise capital. In turn, they also need capital to generate growth. For an early-stage company that’s resource-starved, this kind of squeeze can quickly precipitate a death spiral as a founder’s time and attention gets directed toward investor meetings that are not yielding results: What the founder really should be doing is working on growing the product.
Still, there’s a silver lining here in the form of two strategic tactics that can massively shift the conversation more in the entrepreneurs’ direction. First, entrepreneurs can focus on the total addressable market (TAM) to set the stage for the growth of their business.
Related: Show Me the Money! Best Practices for Raising Capital for Your Startup.
Second, entrepreneurs can focus on storytelling methodologies and tools to tell their unique story better, tug on investor heartstrings and close the deal — at least at this very early stage.
Third, entrepreneurs can draw analogies to other successful startups
Focus on the total addressable market (TAM).
Entrepreneurs raising capital without traction, need to tell a story that illustrates how their total addressable market (TAM) is so attractive and ripe for disruption that future consumer adoption will be readily achieved.
In short, we can define TAM as the total revenue opportunity that is available to your company and/or product in the market today. This is often a critical component of many pitch decks, and investors look to it as a key determinant as to whether the potential to create a massively scalable business exists in an entrepreneur’s category or vertical.
For venture capitalists, the ideal TAM should be sizable enough to grow a $100 million revenue business but not so big that the space is too crowded and any given entrepreneur may get “lost” in a “red ocean” of competitiveness.
Where TAM is particularly challenging to consider are trillion dollar markets like health care or markets in the hundreds of billions of dollars, like advertising.
Where the overall TAM of their space is very large, founders should emphasize and estimate the TAM for their specific sub-vertical or sub-category.
For example, building a marketing technology company in the United States presents the opportunity to take part in the $129 billion a year digital advertising market. On first glance, this kind of size seems too big for a newcomer to make a difference What’s more, it’s crowded with thousands of new entrants every year, and looks extremely challenging to pitch.
Yet, founders can estimate the TAM for their sub-category or sub-vertical (i.e. the TAM for CRM or the TAM for display advertising) rather than the overall market size to bring the size down to a more ideal TAM and significantly cut down the number of competitors.
Focus on your most powerful sales tool: storytelling.
Yet another tactic is for founders to focus on storytelling tactics to make their startup even more attractive. This can be particularly fruitful since humans are predisposed to focus on the power and possibilities of great stories.
This is good news for early-stage startups without traction since story is usually the only thing left to focus on. By focusing on the origins and eventual destination of their startup, founders can actually make their business more attractive than if they had achieved traction, since investors’ imaginations about the potential for growth can sometimes seem limitless. To do this:
First lay a strong groundwork and historical narrative for why your startup is necessary or is solving a particularly acute problem for customers.
The pitch of Airhelp, a service that helps consumers get compensation from airlines for delays, provides a great example of the power of storytelling. By focusing on the nearly universal pain of airline delays, poor customer service and bad inflight experiences, the founders of Airhelp empathized with their audience (face it, most investors fly a lot) and raised capital despite little traction.
Second, craft a story of what the world looks like at scale for your company and the effect on your target customer.
One of the best recent examples of this involved Boom Supersonic, the supersonic jet company. Boom’s pitch focused on the future results and effects of its technology, like trans-oceanic transit times cut in half and day-long business meetings in London. These tactics had the effect of making the company look more attractive because it focused investors on seemingly limitless potential whereby they could “imagine” the future in their own minds. This is exactly what startup founders should want: investor buy-in to their vision.
Draw comparisons to leaders’ companies in your space.
One of the most important tools in the entrepreneural “pitch arsenal,” if you will, is the ability to draw analogies between yours and previously successful businesses. If you do not have the metrics to raise at such an early stage, analogy is a useful tool to illustrate similar market conditions, customer dynamics and the potential for growth that other companies have already demonstrated.
Still, you must be careful when employing analogies. You must avoid your pitch being derivative (i.e. similar to another product but perhaps in a different geographical market) or too obscure or narrow to be obviously exciting.
Solving the “Catch-22” dynamic
For early-stage founders, the “Catch-22” of not being able to raise capital without traction and, in turn, not being able to generate traction without capital can be vexing and even fatal.
Related: Traction Is What Investors Are Looking for When You Present Your Plan
Fortunately, by focusing on your prodouct’s total addressable market (TAM), the power of storytelling and other previously successful businesses, founders can address some of the issues investors will likely bring up, and get back to building their company.