How to show traction beyond revenue

“How can I show traction beyond revenue?”

I frequently get this question from founders of pre-revenue startups. Absent the obvious measure of traction (i.e. revenue), how can I demonstrate that my startup is heading in the right direction and making progress?

Today, this is topical for pre-revenue and post-revenue founders alike. Corporate budgets are being slashed. Software buyers are increasingly risk-averse and reluctant to make drastic purchase decisions for non-mission critical software. Sales cycles are lengthening.

If your time to first revenue is being pushed out, or your revenue projections are coming down, are there non-revenue metrics of traction that you can point to?

Sorenson Ventures was launched in 2017 as a way to address the funding gap that many early-stage founders and startups face as they try to validate product-market fit and define scalable and repeatable growth models. Approximately a third of the companies that we invest in are pre-revenue (at the time of first check). Even post-revenue, growth can be lumpy. As investors, we underwrite our investments on a multitude of data points and evidence, not one metric.

For Revenue-Generating Startups

Data plays an essential role in the decision-making processes for VCs.

For revenue-generating businesses, we typically look at a variety of metrics, including ARR, ARR growth (including new logo, expansion, churn downsell), gross margin, CAC payback, LTV, ACV (average contract value), sales efficiency, sales pipeline statistics and NPS score.

Through these metrics, we are trying to validate:

• Whether your product is solving a real challenge in the world; and

• The extent to which your target customers love and care about the product you are building

For revenue-generating startups, there is typically no shortage of data. However, for many, non-revenue data points, which will be highlighted in the next section, could still be relevant and helpful.

For Pre-Revenue Startups

Non-revenue data points for pre-revenue companies can include:

1. Partnerships or other powerful relationships that can open doors to customers

   “We just signed a MSP that works with Forbes 2000 companies x, y and z. It will take time to figure out how to work together, but we expect this relationship to generate approximately $m million of value in 2024 and $n million of value in 2025”.

2. Design partners

   “We are working with Company x as our design partner. They struggle with Problem y, which costs them up to $z million every year. They evaluated and tried many alternative solutions, but nothing worked. They love what we are working on, and expressed a strong interest in converting to a paying customer once our product is ready for commercial launch".

3. Letters of interest or intent

   Many letters of interest or intent eventually turn into nothing, but it always impresses me when a large company is willing to pick up the pen, and explain why this is a problem and how excited they are about this new product”.

4. Waitlist and pre-orders

   I am #118,692 on the waitlist for Notion AI.

   While not everyone on the waitlist ends up buying, it is a great indicator for the general level of interest in your product.

5. Angel investments from renowned executives

   Are you building a DevOps startup, and the founders of GitHub, Harness and CircleCI are investing? I am excited about the wisdom that these individuals can impart and the doors they can open for you.

   The relevance of the angel investor to your startup and his / her level of engagement are more important than fame and the number of Twitter followers.

6. GitHub stars

   GitHub stars are a useful heuristic for “interest”.

   However, GitHub stars can be gamed. Stars can be bought. Media coverage can temporarily induce spikes of stars that might be dislocated from the actual value or substance of the project.

7. Public attention

   Coverage on TechCrunch or Hacker News is great, but I enjoy reading about what products and open source projects developers are talking about on Reddit, Discord and Slack channels. Are your customers loving and passionately advocating your product?

8. Is your community thriving?

   Nowadays, every software startup has a Slack community. Only a fraction of them thrive.

   If you happen to have a thriving community of customers and champions, or if people are coming to your Slack channel to discuss their challenges, collaborate and do interesting things (ideally involving your product), this is an important data point for investors.

   I recently came across an early-stage startup that has an impressive, thriving Slack community. They have invested a ton in developing content and educational materials, which made them a central destination for developers interested in this topic. Bravo!

   On a related note, I recently listened to Tristan Handy (CEO of dbt Labs) on a podcast, elegantly outlining his thoughts on building a community. It is long but worth quoting in entirety:

I think of this as, you know, the best way to see stars in the night sky is to not look directly at them because it turns out that the edges of your eyesight are much more low light sensitive. And I think one of the best ways to start a community is to not try to start a community.

Sometimes I field questions from software founders who have gotten from zero to one, and now they’re thinking about scalable marketing channels to continue to grow. And they say, “Ah, I want to start a community.” It’s like, I, that’s not generally how that goes.

For us, we were practitioners, we were trying to solve real problems. We were using dbt as a tool in solving those problems, but we were not really just talking about dbt, we were talking about the problems that we were facing in the context of doing the kinds of analytics that digital native businesses do. And so we had a Slack group, and the Slack group was like for our little network of people to kind of collaborate.

And three months in, we ended up working with a company called Casper. They were really very central in the New York tech community in 2016. Their data team was like a dozen people. And they hosted meetups and all this stuff. And as a result of this project that we worked on together, they adopted dbt, and they became this kind of central locus.

They brought other folks from the New York tech community and told them about this new tool that they were using. And things have kind of spread from there. And Drew and I, who don’t live in New York, we were kind of observing all this from afar. We just continued to be helpful on Slack, and people were trying to get set up and running, and people were trying to absorb the things that dbt kind of assumed about how you were going to work.

We just worked with people without any expectation of an immediate payoff there. So if I were going to kind of summarize all that — create some focus that people can kind of organize around and then just provide value. But then do it for a very long period of time. I mean, it was years and years before there were a real meaningful number of people in there.

Ending Thoughts

While fundraising is a high-stakes circumstance for founders and there is a lot of pressure to paint a rosy picture, you don’t necessarily need to hit top quartile metrics across the board. Very few companies look like that.

If your ARR predictably T2D3, you will have a relatively straight-forward fundraising process. If it doesn’t, be sure to point to other metrics and data points that will demonstrate to investors that you are working on an important problem that your customers care about.

You are running an early-stage startup. It is completely normal not to have the answers to all the questions. It would be abnormal not to have kinks and bottlenecks. In fact, I really enjoy collaborating with founders who are trustworthy and honest, and believe that is where I can add the most value.