How do you prove traction?

You have:

1. Found a great idea
2. Massaged that idea into a product
3. Created the infrastructure around the product to constitute a promising startup opportunity.

However, one thing is still missing. That coveted cash infusion to jolt your product to life...

This post will talk about the gap between the sales you will make, and the manufacturing capabilities you have planned, and how proving traction can bring the investment to fill the gap.
Many seasoned veterans of entreprneurship will say "you should not worry about the cash, just keep on working."

...and if you really have that great idea, and the motivation it takes to bring it to market, how could you not?

The truth is: It is hard to get sales if you have not planned a production run yet.

This begs the question: "How does my company fill that gap in such an infantile stage in the startup?" The answer comes down to the ever famous, and somewhat esoteric word- "Traction"

Babak Nivi from @Venturehacks, also a curator of @angelList believes that it takes 3 things to get funded:

1. Social Proof
2. Product
3. Traction

He also says that the team is a big factor, but he thinks a good team tends to sufficiently prove the above three factors...

Social Proof

In the case of BioLighter, We have seen social proof by the hundreds of cans sold over the past year. We have seen social proof by people coming in and bragging about the new uses they have found for our product. We also found social proof by people herding around our table at Greenfest (picture on left: Adam and unknown BioLighter fan) and becoming fans on Facebook. Last month a school teacher approached us to ask for samples to light up in a class lesson about biofuels. (to learn more about social proof, read this post on Muse Traffic)

Investors understand this social proof by: reading testimonials about your product, endorsements from professional organizations, or even a story they can understand of how you are solving a pain point. The Muse Traffic post most compares it to the human instinct to herd around an idea or movement, and whether the investor can see that happening for your product.

For our investors, the top two reasons they chose to put down the money was- 1) because it caters to the macroeconomic shift towards green alternatives. or 2) because women now control 2/3 of household consumer spending and tend to want healthier solutions for their families.

Product

So many entrepreneurs come to the table with ideas, but fail to transform these ideas to viable products in the market. Factors that attract investors to your product can be: the novelty (or newness) of the product, the patent protection you have to own this market, the price point in which you come into the market, etc... Using BioLighter as an example, We proved the viability of our product through:

1. A full 20 year patent to grow and the potentially ubiquitous solution for the $100M Charcoal Lighter fluid market
2. The fact that we come in at the same price (the first biofuel application society has found to have sustained petroleum pricing parity)
3. BioLighter works better than its competition (build a better mouse trap)
4. BioLighter is healthier, cleaner, and tastes better than its competitor

Traction
At the end of the day, your investors want a return on investment. And even the best products that people really want do not always win. Examples abound: the Betamax format war etc... Investors call this ability to prove market penetration: Traction...

The biggest way to prove traction is through purchase orders. BioLighter found its ability to prove traction in two distinct ways: (and narrowing the gap between manufacturing and sales)

1. Contracts

In mid April, 2011 BioLighter signed a contract with this master retailer to assist with the implementation of our business plan. By attracting the attention of a master retailer who was on retainer at companies like Target, BJ's and Kroger, retailing channels became a sizable opportunity. For a % of sales and a consulting fee, he brought us down the path to execution by organizing a roadshow, and warm introductions to other retail outlets for the maximization of ongoing opportunities.

2. Forecasts.

Many entrepreneurs come to investors with hockey stick growth curves. And while this is definitely what investors want to see, it growth curve must be justified. Justification is only as good as your story. So as long as you can justify your assumptions, this should be an easy thing to do.

After forecasting our growth path, the Northern Nevada Development Authority sat us down with SCORE councilor: Jack Van Dien, (picture to the left) in order to see just how we could justify our assumptions.

How to make Assumptions

The lesson learned is that you have to find a way to build up demand. it is illogical to say "ok, well the market size is $100M, and if we get even 1%, we become millionaires." Rather, one should work through (and keep track of) the assumptions to inevitably justify to the investor. With BioLighter, it went something like this:

Sales Cycle:"With one sales person, with an average sales cycle of about 3 months, we conservatively believe that we can convert 1 account per 3 months. These are the leads we have - and we have talked to them this many times. so for our 3 year growth plan, we will bet 10 accounts over 3 years. "

Next there is an industry standard for forecasting demand of retail consumer goods...

Initial Demand: "Each one of these projected companies have this many stores. They will give us this many facings, (literally the face of your product on the shelf) and they will stock their product this deep (amount to fill the shelves). By multiplying these inputs together, we get the initial demand of the stores

Sell Through Rate: The second part of demand is their weekly replenishment, better known as their sell through rate (how much they sell per week). we factored in the seasonality of our product, and said that we will sell between 1 and 3 cans per week. By multiplying that across the number of stores, we come up with a weekly and monthly demand for our various accounts.

By conservatively justifying our demand, and applying it to a proforma income statement, we have an organic way to justify both the value of our company, and the revenues we will receive. (many of the analysts who looked at our financials believe we underestimated our demand, and therefore cheated ourselves out of valuation)

We went through our demand assumptions with Jack Van Dien and added weekly, monthly and quarterly expenses to create a realistic picture of what we were about to get ourselves into. We have since had countless banks, analysts, and investors look through our spreadsheets in their due diligence and come back surprised at our conservatism.

By conservatively forecasting demand, explaining our social proof, and showing how BioLighter was a product poised for success, We received much attention (and as of April 19th, are hoping to put the funding plug in between our production and sales)