‘What is the Traction of your company?’

It is the most common question asked to entrepreneurs when they pitch their startup in front of investors while raising capital.

But, due to less experience, the majority of startups fail to answer this simple yet, relevant question.

In reality, many of the Indian startup founders don’t even know what business attributes ‘are a must’ to incorporate in a pitch deck and which information is relevant to the investor. 

And because of this small, though inexcusable, mistake they fail to raise capital.

It is because of the desires of these young startup founders that the Indian startup ecosystem is growing.

However, due to their less experience regarding relevant formal documents and business figures, the majority of the startups fail to leave a mark the investors, despite having an exceptional idea.

If you are a startup founder and still don’t know how to answer this traction question, then don’t worry.

In this blog, we will show you which traction metrics are a must-have and should be present in your pitch deck.

Before going straight to the traction metrics, let’s talk about what traction means.

What Is Traction?

Traction in business refers to the progress your company has made or the momentum your company has attained over a while, keeping in mind its potential customers.

Having relevant traction removes the uncertainty of workability from your idea and helps in improving your business functions.

Keep in mind, traction doesn’t necessarily mean an increase in metrics like profit, revenue and user base, but it refers to the movement in the said metrics.

Traction shows you whether people are adopting your product/ service or not.

[Also, read: Step By Step Guide on How to Build a Minimum Viable Product (MVP)]

Importance of Traction Metrics In Pitch Deck

Everybody knows business runs on cash. And, to scale your business money is required.

What if, you don’t have the required money to scale or grow?

Then, the only option left here is to raise capital from investors.

But you just can’t go straight to the investor and say invest in my startup, as its an innovative idea. For that, you need some substantial business metrics backing your request.

Investors, on the other hand, receive numerous requests from startups to invest resources in them. But, they have limited money, and they don’t just invest in somebody because their idea seems like a good idea.

That’s why traction is essential and required as it tests the workability of your idea.

Traction shows quantifiable metrics that the investor can assess and further decide whether to invest in your startup or not.

Here are the few traction metrics you must incorporate in your pitch deck to keep it relevant and on point for the investors.

Must-Have Traction Metrics In Your Pitch Deck

EBITDA Margin

EBITDA is an acronym for earnings before interest, tax, depreciation and amortization.

The EBITDA margin is the computation of a startup’s operating profitability as a percentage of its total revenue.

Calculation of EBITDA Margin is done by equalling the total EBITDA (earnings before interest, tax, depreciation and amortization) divided by the total revenue.

EBITDA Margin= EBITDA/Total revenue

Many investors use EBITDA Margin to show how profitable the startup is. EBITDA Margin also shows how lean the venture operates in comparison to their revenue. 

Generally, the average product based company has an EBITDA Margin of about 12%, while the average service based company has an EBITDA Margin of about 18%.

Customer Acquisition Cost (CAC)

Customers equal business and if you don’t have customers you will be out of business soon. 

Customer Acquisition Cost refers to the resources that must be spent to convert a prospect into a customer i.e cost required to acquire customers.

CAC is important because it shows the actual value you are getting out of the resources that you are using.

You can further use CAC to calculate your ROI (Return On Investment).

CAC is generally calculated using two methods- simple and complex method.

In the simple method, only the campaign expenses are used to calculate customer acquisition cost.

Formula To Calculate Customer Acquisition Cost (Simple)

CAC = MAC / CA,

where: CAC = Customer Acquisition Cost

MAC= marketing and advertising costs

CA = Customers Acquired

For Example: If a company spends $100 on marketing and advertising and it acquires 50 customers, their CAC is $2.00.

Complex Method

In this method, every resource that is used to acquire a customer is added to the formula and then only the CAC is calculated.

Resources like marketing cost, software costs for sales and marketing, wages of marketing and sales team, etc., are also included here.

Formula To Calculate Customer Acquisition Cost (Complex)

CAC = MAC / CA,

where: CAC = Customer Acquisition Cost

MAC = Marketing and Advertising costs

CA = Customers Acquired

CAC = MAC+W+ SC+ AE / CA

• MAC = total marketing cost for acquiring customers (not regular customers)
• W = wages connected with sales and marketing
• SC = Software Cost Associated with marketing and sales
•  AE = Additional Expenses Concerning Marketing and sales

A decrease in CAC, as the business grows, is a sign of profitability. And, if CAC value increases, it shows an investor that your startup is unprofitable in the long run.

It’s better to calculate CAC using a complex method, as it gives a clear picture of your startup to the investor.

Month-Over-Month Growth (MOM)

 It is a metric that investors use to assess the overall health and growth trends of the startup.

Month-Over-Month Growth metric shows changes in a specific metric of a business. These metrics include revenue, users, sales, etc., with respect to the previous month.

Generally, for many service-based startups, the M-O-M growth metric is calculated for the total amount of customers. While for product-based companies, the M-O-M growth metric is used for the total amount of products purchased.

Formula To Calculate Month-Over-Month Growth

If you are calculating M-O-M growth in sales, then M-O-M growth in sales = (Sales This Month – Sales Previous Month) / Sales Previous Month x 100

For Example: If your total sales this month are 300 pieces and for the previous month it was 100 pieces, then M-O-M growth in sales= (300-100)/100 x 100= 200/100x 100=200%.

Product Development

The world is evolving, and its stand true for the business world too. What people are using now can become obsolete years later. So, have a product roadmap including details like new features, the inclusion of new technologies, etc., into your product or platform. 

Always remember that traction numbers remove the uncertainty surrounding your startup, and it further helps in presenting your startup more sensibly to the investor.

[Read: Future Of Technology And Its Impact That Indian Startups Should Know]