By Ellie Pigott

Private Equity (PE) investment has long been considered a lucrative yet mysterious realm of the financial world. As opportunities in this sector continue to grow, so do the misconceptions that surround it. In this blog post, we will debunk some prevalent myths surrounding PE investments, shedding light on the realities that private equity investors often overlook. From issues of transparency to perceived riskiness, understanding these misconceptions is crucial for making informed investment decisions in the dynamic landscape of private equity.

1.    Misconception: Lack of Transparency

One prevailing misconception about private equity is the perceived lack of transparency. Many believe that PE firms operate behind closed doors, limiting the level of disclosure they share with investors and the public. While it’s true that private equity investments involve a certain degree of confidentiality, assuming complete secrecy is an oversimplification. In reality, reputable PE firms understand the importance of transparency and regularly provide investors with detailed information on fund performance, strategy, and financial health. By fostering trust through open communication, firms aim to build enduring partnerships with their private equity investors.

At Traction Capital, we promote transparency through quarterly investor updates that include portfolio highlights, lowlights, financial performance, and areas in which investors can lend a hand. In addition, we host an Annual Fund Update that includes a deep dive into fund performance and an opportunity to connect directly with founders and key leadership.

2.    Misconception: Risk Tolerance

Another common misconception revolves around the perceived riskiness of investing in private equity. Some investors shy away from the asset class due to the notion that it is too volatile and unpredictable. While it’s true that private equity investments carry inherent risks, the level of risk can vary significantly based on the type of investments made and the expertise of the PE firm. Seasoned private equity investors conduct thorough due diligence, carefully selecting opportunities and implementing strategies to mitigate risks. Understanding that risk is inherent in any investment, regardless of public or private markets, helps dispel the myth that private equity is unmanageably precarious.

3.    Misconception: Limited Liquidity

A prevalent misconception among potential private equity investors is the idea that their money will be tied up with little liquidity for an extended period. While it’s true that PE investments typically have longer holding periods compared to public equities, this does not mean investors are completely locked in. Many PE funds have specific exit strategies, such as selling portfolio companies or pursuing secondary market transactions, providing investors with opportunities to access their capital. Understanding the expected holding period and exit mechanisms is crucial for aligning investment horizons with personal financial goals.

4.    Misconception: Exclusivity and Inaccessibility

Some investors perceive private equity as an exclusive club, accessible only to institutional investors or high-net-worth individuals. This misconception often stems from the historical norm, but the landscape is evolving. Today, many PE firms offer investment opportunities to a broader range of investors through funds, providing diversification benefits typically associated with institutional portfolios. Access to private equity is expanding, and investors can explore various avenues to participate, fostering a more inclusive investment environment. Although more accessible than previously, many funds still have investment minimums and require investor accreditation.

Starting Investing Today

As the private equity landscape continues to evolve, dispelling these common misconceptions is crucial for fostering a more accurate understanding of the opportunities and challenges within this asset class. Investors who delve into private equity armed with accurate information and a nuanced perspective are better equipped to navigate its complexities. By challenging preconceived notions, we pave the way for a more inclusive and informed investment community, unlocking the true potential that private equity has to offer.

If you have questions or are interested in investment opportunities within PE, reach out to us at cooper@tractioncapital.com.

 

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By Ellie Pigott

Selling your business can provide you with financial flexibility, free up time from day-to-day responsibilities, allow for retirement or lifestyle changes and much more. However, many businesses owners are hesitant due to common private equity misconceptions. Some of these PE misconceptions and fears include incoming layoffs, “stripping and flipping”, strategic misalignments, loss of control, and impact on company culture. In this blog, we’ll dive in and debunk these common private equity misconceptions and help you set up your exit for success.  

1. Misconception: Strategic Misalignments 

A common fear or misconception amongst business owners is that the private equity firm’s strategy doesn’t align with the company’s mission. It’s not unlikely you will encounter these firms in the process of selling your business, but thorough due diligence and clear discussions during the negotiation process will help determine alignment on strategic goals. Business owners should choose a PE partner whose vision aligns with the long-term objectives of the company. Sometimes this results in taking less money upfront to benefit the overall well-being of the company.  

2. Misconception: Stripping and Flipping 

Within the broader definition of strategic misalignments, many businesses owners are weary of PEs because of their reputation to “strip and flip” the businesses they purchase. The term “strip and flip” refers to selling off valuable assets of a company and then selling the restructured entity. This model is used by some, but similarly to points made in “Common VC Misconceptions Many Founders Face”, not all PEs share the same model. Some common PE models include distressed investing (focus on purchasing companies that are going under) and growth equity (additional funding to add value and grow a business). When considering different buyers for your business, look at their firm’s model and consider what that might look like when applied to your business. 

When acquiring companies, Traction Capital exclusively uses a growth equity mindset. Traction intentionally seeks out companies where they can offer experience and a proven process to foster growth. 

3. Misconception: Selling Your Business = Layoffs 

Whether a PE firm uses a “strip and flip” model, or invests through growth equity, incoming layoffs can be a realistic fear but aren’t necessarily imminent. Clear communication and transparency about organizational changes and the role of key personnel are essential. Many private equity firms recognize the value of retaining experienced and talented executives and key employees. As such, part of the acquisition strategy often includes efforts to retain and incentivize key personnel. This may involve offering performance-based incentives, equity participation, or other retention measures.  

4. Misconception: Loss of Control and Impact on Company Culture 

Many businesses owners spend years growing and nurturing their business and fear losing complete control when they sell. As many items discussed in this blog, communication in the company vision is key and if continued involvement is desired it needs to be articulated. Instead of a purely hierarchical relationship, some private equity firms view the ownership transition as a partnership. They understand that the success of the business relies on a collaborative effort between the existing management team and the new ownership structure.  

This means owners and key executives may still be actively involved in strategic decisions, business planning, and day-to-day operations. While there may be changes in reporting structures, the goal is often to maintain continuity and benefit from the collective insights of both the existing and new leadership. Culture often plays an important role in this, ensuring values and company mission remain constant helps ensure a smooth transition. 

Next Steps in Selling Your Business 

While daunting at first, selling your business could provide much desired financial and lifestyle flexibility. By debunking the common private equity misconceptions many business owners face, you can be better informed when considering selling your own business.  

If you’re interested in selling your business to a growth equity PE firm or want to know more about what the process might look like, reach out to us at cooper@tractioncapital.com 

 

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By Ellie Pigott

Investing in a venture capital fund can be a great way for investors to diversify wealth beyond traditional means like stocks and bonds. However, many shy away from this potentially lucrative avenue because of uncertainties and common VC misconceptions surrounding returns, success rates, involvement and theses among funds. In this blog we’ll help explore and debunk many misconceptions faced by investors considering venture capital.  

1. Misconception: All Venture Capital Funds Are the Same 

When many investors think of venture capital funds, they picture traditional Silicon Valley funds investing hundreds of millions into prospective unicorns. While these funds do exist, they are only one piece of the larger VC pie. VCs come in all shapes and sizes, and their theses can vary dramatically. Examples of thesis niches include geography, industry, investment size, and company stage. It is important to consider your personal interests, values, specific areas of economic impact, and level of desired involvement before selecting a VC whose investment thesis aligns with yours.  

2. Misconception: Investor’s Returns Are Quick and Guaranteed  

Because of startups’ rapid growth, some investors may approach venture investing expecting an equally rapid return. Although the goal of a venture capital fund is to achieve significant and fast growth with the companies it invests in, this process still takes time. The average lifetime of a venture fund is around 10 years, which includes the time it takes to make all of the fund’s investments and exit from them (either by acquisition, IPO or liquidity). Fund managers may seek extensions if they anticipate needing to manage some of the investments longer.  

Some investors may also expect “guaranteed results” from VC in the same way they would expect certain results from other investments like treasury bonds. It is important to note that VC investments are inherently risky. The lack of a proven track record, uncertainty in market demand, and the potential for unforeseen challenges all contribute to the high level of risk. Despite this inherent risk, many VCs mitigate by having a lengthy and comprehensive due diligence process where they weigh the potential challenges and opportunities.  

3. Misconception: Most Portfolio Companies Will Succeed 

With such high return rates, it’s not uncommon to think that the majority of investments would be successful, but in most cases, this is the opposite. Every venture capital fund is different, so it’s important to seek information on your fund’s thesis, but generally, most VCs expect that for every 10 companies they invest in, 9 will fail. Traditional VCs rely on only a few successful exits to drive overall fund returns. However, some nontraditional and non-coastal VCs (like Traction Capital), rely on a different model. These nontraditional funds tend to bet that a higher number of their portfolio companies will succeed but at a more realistic level ($50M exits instead of billion-dollar exits).  

4. Misconception: Investors Have Limited Involvement in Portfolio Companies 

Just as all funds are different, the same is true for investors. Some VC investors seek a high level of involvement with the companies they help invest in, while others prefer to remain only as financial support. It is not typical for a VC fund to manage portfolio companies directly, but their involvement, advice, and network can be crucial for the success of startups. Active engagement and support from investors can contribute significantly to the growth of portfolio companies, especially when the investor can provide specific industry experience. Before investing in a fund, inquire about their level of involvement and determine if there are ways you can add value.  

Mastering the Venture Capital Landscape 

To navigate the world of venture capital successfully, it’s important for investors to be informed and understand the nuances of different funds, embrace the inherent risks, and recognize the potential for meaningful involvement and long-term returns. By addressing these misconceptions, investors can make informed decisions that align with their financial goals and risk tolerance in the dynamic landscape of venture capital funds.  

If you’re interested in taking the next step in learning more about investment opportunities in venture capital or have questions, reach out to us at ellie@tractioncapital.com 

 

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By Ellie Pigott

Venture Capital (VC) can be a game-changer for startups, providing essential capital and strategic guidance to fuel growth. However, amidst the promises and potential benefits, founders often grapple with misconceptions that can shape their perception of engaging with VC firms. In this blog, we’ll delve into three common VC misconceptions that frequently surface in the startup ecosystem: misaligned interests, unhealthy growth rates, and the fear of loss of control. It is important to note that not all VC’s are created equal, but by unraveling general VC misconceptions, we aim to provide a clearer understanding for founders considering VC partnerships.

1. Misaligned Interests: VC’s Will Put Their Own Interests Before Their Portfolio Companies

One key to avoiding misaligned interests with any potential partners is to be clear in expectations from the beginning. During any initial or diligence meetings with potential venture capital partners, be honest in your vision, perceived feasible growth rate, and personal interests for your company. Tailoring or fudging your answers to better increase your odds of receiving funding will only hurt both parties down the line. Likewise, it is also important to ask your potential VC tough and direct questions about their intentions with the company. Examples include, what kind of growth would be expected if we received funding? What would happen if we were not hitting the expected growth? How have you handled previous difficult situations in your portfolio? How involved are you in your portfolio companies?

A VC’s level of portfolio involvement can often be an indicator of how they handle struggles within their portfolio. A larger, more hands-off VC may be more inclined to cut their losses at the first sign of trouble, while a smaller more involved VC may be more likely to put the time and energy into a struggling company to help it be more successful.

Overall, your venture investors are betting on your success and will benefit more if you succeed. Although they have a duty to create returns for shareholders, creating value for their portfolio companies and founders will ultimately help them to generate a higher return.

2. Unhealthy Growth Rates: VC’s Will Push You to Grow Faster Than What is Best for the Company

High growth rates can be daunting, especially when considering the short time span many VCs are built around. It’s important to understand that not all VC’s are built the same, meaning some are designed around portfolio companies achieving a 30X return in 5 years, while others are created around a thesis that allows for 10X growth in 3-5 years. Doing research on or inquiring about potential VC’s growth expectations is a crucial step in finding the right partner. This is also a great step in considering if your company is a good candidate for venture capital. If a minimum of 10X growth within 3-7 years doesn’t feel feasible with your business model or doesn’t align with your vision and values for the company, you may be a better candidate for traditional financing like bank loans.

As mentioned previously, the most important part of a successful VC partnership and the best way to avoid unhealthy growth rates is clear communication. VCs want to generate a successful return but will structure your investment with an exit number already in mind. These expectations could be adjusted down the road if there is a significant change in market size but will likely come with a plan to increase staff, strategy and general support.

3. Fear of Losing Control: VC’s Will Take Control of My Company

Fear of giving up equity in your company can stem from a variety of concerns, often completely justified, but also commonly misunderstood. Are you nervous that giving up equity will result in lower cash in your pocket when your exit? Do you worry VC partners will exert influence over crucial decisions, and limit your autonomy in steering the company’s direction? Does the possibility of a board takeover keep you up at night? All of the above are common VC misconceptions many founders face around investor control, but are any of these true?

  • Giving Up Equity

    Many founders have in mind that the more equity they retain, the more money they’ll receive in an exit. This can be true, up to a certain point, which is why the complexity of equity in startups is often compared to pie. Founders tend to think of giving up equity as giving up a piece of the pie, and every time you give up equity, your piece of the pie shrinks. In reality, the pie is continually growing. For example, after two rounds of funding you may only own 40% of your company. But because you took funding and used it to strategically scale, you now own 40% of a $30M business, instead of 100% of a $1M business. In this example, the option with less equity would produce you a higher return. This analogy is great to consider when selecting the right partner. Is the partner you’re adding going to provide an adequate amount of value for the equity they’re receiving?

  • Exerting Influence

    When vetting potential investments, a commonly heavily weighed factor is the team. VC’s look for strong founders that are experts in their industry. Knowing that you are an industry expert allows VC’s to only get involved at a high level and helps them avoid power struggles with founders. Another structure in place that helps avoid investors having too much influence is the structure of your board. More info on boards below.

  • Board Takeover

    Has the Sam Altman Open Ai board situation made you wary of board structure? As mentioned above, curating a sound board can be a great way to balance power. Many founders limit boards to contain only one seat per round, this seat typically goes to the lead investor and helps to avoid too many voices in the room. It is also standard for founders to secure their board spot and a seat for other key members through seats referred to as “Common Control Members”. It is also important to classify voting rights amongst board members and designate in your bylaws what specific actions require board approval. For more information on board composition, check out this resource: https://www.ycombinator.com/library/3w-how-to-create-and-manage-a-board

Mastering the VC Landscape:

Navigating the realm of Venture Capital can be difficult and at times nerve racking. VC’s can be a great resource for founders looking to scale, but lack of upfront communication can at times be fatal. To address misaligned interests, clear communication during initial meetings with potential VC partners is crucial. Do diligence on any potential partner and have an idea of where you stand on important issues (company vision, growth rates, board seats, etc) ahead of time.

If you’re interested in taking the first step and exploring VC funding, check out our Investment Criteria and select Apply Now to fill out a funding application!

 

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By Cooper Eral

Private Equity (PE) is a complex and intriguing realm of investment that often raises many questions for those considering it. As you contemplate the prospect of a PE investment, you’re likely to encounter a myriad of questions that delve into the intricacies of how PE firms operate, generate returns, and conduct their business. To help you navigate this world of PE investment with confidence, this blog aims to address some of the most frequently asked questions regarding private equity. We will demystify the process, explore the strategies that PE firms employ, and provide you with a comprehensive understanding of what to expect when considering PE as an investment avenue.

How do PE firms generate returns for their investors and themselves?

Private equity funds primarily generate income for themselves through what is known as 20 and 2. The 20 being “carried interest” and 2 being the “management fee”. This 2% is derived from the total committed capital and helps to sustain operations at the fund. The 20% is a crucial component in keeping the priorities of the fund and its Limited Partners aligned.  With 20% being the primary source of returns to the fund, it encourages its agents to source deals and grow companies with the greatest returns.

Do I receive dividends from profitable portfolio companies or are they used elsewhere?

Unless explicitly laid out in an investor subscription agreement, this is largely left to the discretion of the fund.  If the firm feels dividends could be best reinvested and focused on growing the PortCo, they will be used in this way. Alternatively, the company may require more guidance rather than continual capital needs, in this case distributions would be made equally across LPs, following the 20% carried interest allocated to the fund.

How do PE firms conduct due diligence and valuation of target companies?

This can vary from fund to fund but all groups will consider factors such as financial, legal, operational, management, and ESG due diligence. Depending on the specific thesis of the fund there may be greater scrutiny over a particular area, whether to avoid risk or ensure their unique value-add aligns with the needs of the potential portfolio company. Similarly, smaller funds may determine it is best to outsource specific aspects of due diligence in areas where they are not particularly knowledgeable or if they are focused on other areas. This will be determined prior to the commitment of capital.

When will I need to provide the capital for my PE investment?

Depending on the opportunity you take advantage of, whether a Special Purpose Vehicle (both debt and equity format) or buy in to a fund, this will vary. For a SPV, all capital invested is collected up front as this contribution is going directly to a specific need of a portfolio company. On the flip side, when committing capital to a fund there are capital calls and an upfront drawdown. The upfront drawdown is often 10 – 20% of the total agreed contribution. Capital calls occur (typically) at predetermined periods throughout the designated life of the fund. These capital calls are often enforceable by law based on contractual agreements between limited partners and the fund.

What are the key terms and conditions of a private equity deal, such as equity stake, debt financing, governance rights, exit clauses, etc.?

    • Equity Stake

      This is the percentage of the company’s shares that the private equity firm acquires in exchange for its investment. The equity stake determines the ownership and control rights of the PE firm over the target company.

    • Debt Financing

      This is the use of borrowed money to fund a private equity deal, usually in the form of bank loans or bonds. Debt financing increases the leverage and returns of the PE firm, but also increases the risk and interest payments. The amount and terms of debt financing depend on the creditworthiness of the target company, the availability and cost of credit in the market, and the structure and covenants of the debt instruments.

    • Governance Rights

      These are the rights and obligations of the PE firm and the target company’s management regarding the strategic and operational decisions of the company. Governance rights can include board representation, voting rights, veto rights, information rights, consent rights, and anti-dilution rights. Governance rights aim to align the interests and incentives of the PE firm and the management, and to protect the PE firm from adverse actions by the management or other shareholders.

    • Exit Clauses

      These are the provisions that specify how and when the PE firm can sell its stake in the target company and realize its returns. Exit clauses can include put options, drag-along rights, tag-along rights, pre-emption rights, and redemption rights. Exit clauses aim to ensure that the PE firm has sufficient liquidity and flexibility to exit the investment at an optimal time and price.

How do private equity firms create value in their portfolio companies through operational improvements, financial engineering, strategic initiatives, etc.?

As the question suggests, this is one area where funds can delimitate themselves from others in the market. Funds such as Traction Capital’s Focus Fund I seek to help founders and management teams expand upon their current strengths while offering resources to build up their weaknesses. Traction Capital (TC) strongly believes in the fundamental ability of Entrepreneurial Operating System® (EOS®) to efficiently go about these transformations within a newly acquired company. Any area with needs beyond the scope of EOS will be advised by an internal member of TC who also is a seasoned entrepreneur with relevant experience.

How can I invest in private equity?

There are different ways to invest in private equity, depending on risk tolerance and financial objectives; here are some of the most common ways. (listed in order from most to least knowledge and experience required).

    • Direct Investing

      This involves investing directly in a private company or a private equity fund. This can require a large amount of capital, due diligence, and expertise.

    • Co-Investing

      This involves investing alongside a private equity fund in a specific deal or company. This allows investors to reduce fees and increase exposure to a particular sector or opportunity.

    • Fund-of-Funds

      This involves investing in a fund that invests in multiple private equity funds. This allows investors to diversify their portfolio and access different strategies and geographies.

    • Secondary Market

      This involves buying or selling existing stakes in private equity funds or companies from other investors. This allows investors to enter or exit the market at different stages of the investment cycle.

    • Publicly Traded Vehicles

      This involves investing in publicly listed companies that invest in private equity or operate as private equity firms. This allows investors to access the public market liquidity and transparency while benefiting from the private market returns.

    • Traction Capital Focus Funds

      While this is a form of direct investing, there is nothing typical about the investment Traction Capital makes. Beyond the deployment of capital, TC offers their expertise, resources, and network to maximize the growth potential of each PortCo. To get updates on how to get involved with Focus Fund II or sidecar options, reach out to Ellie at Ellie@tractioncapital.com to learn more!  

Considering Private Equity

A PE investment can be a rewarding endeavor, but it comes with its unique set of considerations and complexities. The questions covered in this blog are just the starting point in your journey to grasp the world of PE investments. As you explore further and consider your investment options, it’s vital to engage with trusted advisors, conduct thorough due diligence, and remain informed about the ever-evolving landscape of private equity. By understanding how PE firms generate returns, how dividends are distributed, the due diligence process, capital requirements, key terms and conditions, value creation strategies, and the various ways to invest, you’ll be better equipped to make informed investment decisions. Remember that the world of private equity is dynamic, and a well-informed investor is best positioned to navigate its intricacies and reap the potential benefits it offers.

 

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By Chris Carey

Welcome to the second edition of Traction Capital’s AI Insights! We are thrilled to continue our exploration of the transformative power of Artificial Intelligence (AI) in the world of entrepreneurship.

“There are decades where nothing happens, and there are weeks where decades happen.” 

In this edition, we present several compelling articles that highlight the latest AI trends and practical applications for your businesses:

Midjourney Beginners Tutorial

Getting Started & Creating Your First AI Art

Learn how to create AI-generated images using one of the most popular tools available.  This 5-minute video will show you how to create a discord account (which is where Midjourney lives), utilize relevant tools, and create your first piece of art!

If you’re looking to dive a bit deeper into Midjourney our portfolio company founder Shane Smith of Prime Party got hooked after coming across this video. He also shared a PDF demonstrating how he used Midjourney to create lifestyle product images for his website – check it out here!

AI-Generated Job Descriptions

For those of you that are hiring, take a look at AI-JD, a free AI job description generator. The result may not be exactly what you’re looking for, but you can count on a significant head start.  Check out what it came up with for a Traction Capital “Business Analyst” with nothing more than my email address and a job title!

ChatGPT Prompts for Startup Founders

Unsure how to leverage ChatGPT?

Here are some prompt suggestions ChatGPT generated as a result of the prompt above:

  1. Goal Setting and Planning

    • Help me set SMART (Specific, Measurable, Achievable, Relevant, Time-bound) goals for this quarter.
    • Generate a weekly plan based on the following tasks and priorities…
    • Could you help me break down this large project into smaller, manageable tasks?
    • What is a good way to plan and approach this specific task? (provide details about the task)
  2. Task Prioritization

    • Can you help me prioritize these tasks? (provide a list of tasks)
    • Considering the deadlines and the impact on the business, how should I prioritize these projects? (provide details about the projects)
    • How can I differentiate high-value tasks from low-value ones?
  3. Time Management

    • Can you help me create a daily schedule to manage these tasks? (provide a list of tasks)
    • Can you suggest a method for time-blocking these tasks? (provide details about tasks and available time)
    • What are some time management techniques I could use in my daily routine?
  4. Decision Making

    • Can you provide pros and cons for the following decisions? (provide details about decisions)
    • How can I make a decision matrix for these options? (provide details about the options)
    • How do I use the Eisenhower Matrix to decide on these tasks? (provide a list of tasks)
  5. Efficiency and Productivity

    • What are some strategies to increase productivity for these tasks? (provide details about the tasks)
    • What kind of productivity techniques can I use to speed up my work without compromising quality?
    • How can I eliminate or reduce distractions while working on these tasks? (provide details about the tasks)
  6. Learning and Development

    • Can you suggest some resources for improving my skills in (specific skill)?
    • How can I apply the concept of “learning how to learn” to improve my proficiency in (specific area)?

 

It is our hope that this second edition of AI Insights offered valuable perspectives and strategies to help you navigate the AI landscape and harness its potential for growth and innovation.

We encourage your active engagement with us! Share your thoughts, questions, and specific AI topics or challenges you’d like us to cover in future editions. Your input drives the customization of our content to meet your needs effectively.

Together, let’s unlock the full potential of AI and propel your businesses to new heights of success!

 

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By Cooper Eral

For startups seeking funding, demonstrating traction is an essential factor that investors look for. Traction proves that your business idea is gaining momentum, attracting customers, and holding growth potential. Whether you are a pre-revenue or post-revenue startup, effectively conveying your traction can significantly increase your chances of securing funding. This blog post will explore the best ways for startups to show traction, with specific tips for pitch decks.

Pre-Revenue Companies

For startups yet to generate revenue, conveying traction revolves around showcasing the interest and demand for your product or service. Consider the following examples of strategies a pre-revenue founder can use to demonstrate traction:

  • Feedback and Validation

    Share feedback received from beta testers and potential customers who have experienced your product or service. Positive reviews and testimonials can be powerful in establishing the credibility of your offering.

  • Research and Market Validation

    Present any research conducted in your target market to demonstrate the demand for your solution. Showcase studies, surveys, or market analyses that support your value proposition.

  • Early Access Sign-ups and Smoke Tests

    If applicable, mention the number of early access sign-ups you have received. Smoke tests, where you gauge interest through mock offerings or ads, can also provide valuable data.

  • Intellectual Property

    Highlight any patents filed or unique intellectual property you possess. This can demonstrate a competitive advantage and barriers to entry for potential competitors. Be sure to include any regulatory milestones you have surpassed as well; these often take time and can be costly.

Post-Revenue Companies

For startups that have started generating revenue, the focus shifts to financial performance and sustainable growth. Here are some key metrics to convey traction:

  • Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR)

    MRR and ARR are critical indicators of your revenue stream’s predictability and growth potential. This provides clarity on the sustainability of your revenue streams.

  • Profitability

    Investors are keen on businesses that can demonstrate profitability or a clear path to it. Showcase your progress towards becoming a sustainable and profitable enterprise.

  • Customer Acquisition Costs (CAC)

    For business-to-consumer (B2C) startups, understanding and conveying your CAC can showcase the efficiency of your marketing and sales strategies.

  • Segment Progress

    Highlight your success in penetrating your initial customer segment. This shows that your product-market fit is effective.

Tips for Traction in a Pitch Deck

Incorporate traction strategically into your pitch deck to make a strong impact:

  • Timing is Key

    Introduce traction sparingly in the early slides of your deck, building up the problem, your story, and the solution. Reserve the bulk of the traction-related information for later in the presentation.

  • Explain Significant Boosts

    If there has been a sudden and substantial increase in traction, be prepared to explain why. This can help instill confidence in potential investors.

  • Focus on the Core Product

    Stick to presenting traction related to the product or service you are pitching. Avoid including information about legacy products or unrelated services.

For a deeper dive into how your startup can demonstrate traction, check out this great video by Wayne Hu regarding metrics VC firms seek to hear.

Take Your Traction to the Next Level

Conveying traction effectively is crucial for startups seeking funding. Whether you are a pre-revenue or post-revenue company, showcasing customer interest, market validation, revenue growth, and profitability are vital. By following these tips and structuring your pitch deck thoughtfully, you can significantly enhance your chances of attracting the investment needed to take your startup to new heights. Remember, traction is not just about numbers; it is about demonstrating the potential and viability of your business in the market.

If your startup has traction and you’re interested in learning more about funding options, reach out to Ellie at ellie@tractioncapital.com.

 

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By Ellie Pigott

In the fast-paced and ever-evolving world of venture capital (VC), any calculated risks can disrupt the carefully cultivated ecosystem. One such risk caused a catastrophic event that has sent shockwaves through the VC community, the crash of SVB (Silicon Valley Bank), a prominent financial institution that has been instrumental in financing countless startups. The SVB crash has not only affected the bank itself but has also raised concerns about its ripple effects on the wider VC landscape. In this blog post, we will explore the potential implications of the SVB crash on the VC world and discuss how investors and startups may navigate this challenging situation.

The Potential Implications

1. The Unsettling Effects on Investor Confidence:

The collapse of a prominent player like SVB has undoubtedly shaken investor confidence in the VC industry. Investors are likely to become more cautious and re-evaluate their risk tolerance. The incident may prompt a surge in due diligence processes and stricter investment criteria, as investors strive to avoid potential risks associated with unstable financial institutions. Consequently, startup founders may experience increased scrutiny and a more demanding negotiation process when seeking funding. Not only does this mean a rocky future for startups raising, but for venture firms looking to raise funds as well.

2. Funding Challenges for Early-Stage Startups:

SVB’s crash could particularly impact early-stage startups, which heavily rely on venture capital to fuel their growth. With SVB’s absence, there could be a significant reduction in the available capital for seed and Series A funding rounds. Startups may face difficulties in securing the necessary resources to validate their ideas, develop their products, and scale their operations. This may result in a more competitive funding landscape, with startups vying for the attention of a smaller pool of investors. In addition, with a decrease in investor confidence, valuations will continue trending downward.

3. Emergence of Alternative Financing Options:

While the SVB crash poses challenges, it may also stimulate the emergence of alternative financing options. As startups seek alternative sources of capital, we can expect a rise in other financial institutions and non-traditional funding models stepping in to fill the gap. For instance, crowdfunding platforms, angel investors, corporate venture capital, and strategic partnerships might gain prominence as viable alternatives to traditional VC funding. This shift could introduce a new dynamic into the startup ecosystem, promoting diversification and resilience.

4. A Focus on Financial Stability and Risk Management:

The SVB crash serves as a stark reminder of the importance of financial stability and robust risk management in the VC industry. The bank failed because it bought too many long-term notes at low rates, after word of this slipped that they were under water, many depositors pulled deposits, causing a bank run.  Going forward investors will likely demand greater transparency and accountability from the startups they fund. In turn, startups may need to enhance their financial management practices, establish contingency plans, and demonstrate a solid risk mitigation strategy. This increased emphasis on financial stability may lead to a healthier and more sustainable VC ecosystem in the long run.

5. Potential Regulatory Changes:

Following the SVB crash, regulators might review and revise existing regulations to prevent similar incidents in the future. Increased scrutiny and stricter regulations surrounding the operations of financial institutions could be expected. This may include enhanced oversight, mandatory stress tests, and measures to ensure the stability of banks and their relationships with the VC industry. While such changes might bring additional compliance burdens, they could also foster greater stability and resilience within the financial ecosystem.

The crash of SVB has sent shockwaves through the VC world, introducing uncertainty, and raising concerns among investors and startups alike. While the full extent of its impact remains uncertain, the event calls for a careful evaluation of the VC landscape. The challenges posed by the SVB crash will likely prompt investors to exercise greater caution, potentially leading to a more selective funding environment. Startups, particularly those in the early stages, may face funding challenges and will need to explore alternative financing options. This period of transition could pave the way for the emergence of new players and funding models, fostering a more diverse and resilient VC ecosystem. Ultimately, the SVB crash should serve as a catalyst for greater emphasis on financial stability and risk management.

The Traction Difference

Funds like Traction Capital, among others, are taking a more wholistic approach, in both the way we hold our money and the way we invest. When evaluating startups, Traction assesses the financial risk, the team, and the market. One way we minimize the risk of our investments is by exclusively investing in post revenue companies. This shows proof of product market fit, and evidence of founder follow through. When handling our firm’s finances, we practice banking diversification and to drive a higher return for investors while building relationships with other banks to assist our Founders better with their banking needs. When managing our investor’s money, whether already invested in a company or waiting for deployment in the bank, we believe in transparency.  Traction keeps investors front of mind by sending frequent updates on the status of the portfolio companies, their money and anything in the market that may be cause for concern.

Still Unsure about Banking or Raising Capital?

Traction Capital is dedicated to helping the startup community thrive, especially in this uncertain climate. If you’re interested in changing banks but don’t know where to start, we have a handful of great local banks we would be happy to recommend. In addition, if you’re a startup raising capital or a business owner looking to sell, reach out to Peyton Green at peyton@tractioncapital.com .

By Chris Carey

Welcome to Traction Capital’s AI Insights!

At Traction Capital, we are committed to supporting startups by providing them with valuable resources and industry trends that can drive their success. Artificial Intelligence (AI) has become an integral part of the business landscape, revolutionizing various sectors and opening up countless opportunities for innovation and growth. With AI rapidly transforming industries and reshaping customer expectations, it is crucial for entrepreneurs to stay informed and harness the power of this transformative technology.

With our AI Insights series, we aim to deliver periodic blogs packed with curated content, expert insights, and practical applications of AI that can directly benefit your businesses. Our goal is to keep you ahead of the curve, empower you to leverage AI effectively and unlock new avenues of growth and profitability.

In this inaugural edition, I’m delighted to share with you four key insights that can add value to your entrepreneurial journey:


ChatGPT Tutorial

ChatGPT Tutorial Video - A Crash Course on Chat GPT for Beginners - Adrian Twarog

ChatGPT Tutorial – A Crash Course on Chat GPT for Beginners – Adrian Twarog

A Crash Course on Chat GPT

This 34-minute video is one of the best introductions to ChatGPT that I’ve come across to date. It begins by helping you gain access to the tool and even includes examples of some of the most popular use cases. Click “Show more” in the description for timestamps to jump to specific topics of interest.


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Google’s Stance on AI Content

“At Google, we’ve long believed in the power of AI to transform the ability to deliver helpful information. In this post, we’ll share more about how AI-generated content fits into our long-standing approach to show helpful content to people on Search.”


AI Tips & Tricks: Prompt Generation

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Having trouble coming up with great prompts?

Use the 3-step process illustrated above or click here to learn how to turn ChatGPT itself into a prompt generator!


Chris Munn (@chrisxmunn) on Twitter

Chris Munn (@chrisxmunn) on Twitter

AI Use Case: Automate SOP’s

One of the hardest parts of running a business is documenting everything. Check out how Chris Munn utilized ChatGPT to create a QuickBooks related SOP in no time!

Read more


These insights merely scratch the surface of the immense potential AI holds for entrepreneurs like yourselves. Our AI Insights series will continue to dive deeper into various aspects of AI for entrepreneurs, providing you with valuable knowledge, practical tips, and thought-provoking ideas to stay at the forefront of AI-driven innovation.

We value your feedback and encourage you to share your thoughts, suggestions, and topics of interest that you would like us to explore in future editions. Together, we can leverage the power of AI to create better businesses and achieve new heights of success.

 

P.S. The verbiage and format of this blog were created by ChatGPT with minimal human editing!

 

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By Ellie Pigott

Startups face many challenges in their journey to success, but perhaps the most critical is finding product-market fit. This is the stage where a startup has developed a product or service that meets the needs of a specific group of people, otherwise known as their target market. When achieved, the startup has found a sustainable business model that generates revenue and customer satisfaction. In this blog, we will explore the importance of having product-market fit for startups.

What is product-market fit?

Product-market fit is the intersection between the needs of the market and the product or service being offered by a startup. It is the point where the product is fulfilling a real need for customers and generating revenue for the business. This is not a static state, but rather an ongoing process of fine-tuning and improving the product to meet the changing needs of the market. Another way this is sometimes measured is by surveying what percentage of your customers would be greatly disappointed if they could no longer use your product or service.

Why is product-market fit important?

Product-market fit is critical for startups for several reasons:

1.   Customer satisfaction and retention

Solving the problem of your audience means that the product or service is meeting the needs of the target market. Customers are satisfied with the product, and as a result, are more likely to continue using it and recommend it to others. This can lead to higher customer retention rates and a strong word-of-mouth marketing campaign, which can be essential for startups with limited marketing budgets.

2.   Revenue growth

Another way product market fit can be detected is if there is a strong demand for the product. This demand can lead to increased sales, higher profit margins, and a sustainable business model. Without first checking for product-market fit, startups risk launching products that nobody wants, which can lead to low sales and a lack of revenue.

3.   Competitive advantage

When a startup has a product or service that is meeting the needs of the market, it can set itself apart from competitors. This can lead to a stronger market position, higher market share, and increased profitability.

How to achieve product-market fit?

Achieving product-market fit is a complex process that requires a deep understanding of the target customer and the solution being offered. Here are some steps that startups can take to achieve product-market fit:

1.     Identify the target market

The first step in designing for the market is identifying the target market. Startups need to have a clear understanding of who their ideal customer is, what their pain points are, and what their needs are. This can be achieved through market research, customer surveys, and other forms of feedback.

2.   Develop the product

Once the target market has been identified, startups need to develop a product or service that meets their specific needs. The product needs to be designed with the customer in mind and should be user-friendly and easy to use. Startups should also focus on creating a unique value proposition that sets them apart from competitors.

3.   Test the product

Startups need to gather feedback from customers and use it to improve the product. This can be done through customer surveys, focus groups, or beta testing. The feedback should be used to refine the product and make it more aligned with the needs of the target market.

4.   Monitor metrics

Startups need to monitor metrics to determine whether they have achieved product-market fit. Metrics such as customer acquisition, retention, and revenue growth can provide insights into whether the product is meeting the needs of the target market. Startups should use these metrics to refine the product and make improvements.

Next Steps

Product-market fit is critical for startups that want to achieve sustainable growth and success. It is the point where a startup has developed a product or service that meets the needs of the target market and generates revenue for the business. Achieving this requires a deep understanding of the target market, a user-friendly product, testing, and monitoring metrics. By achieving product-market fit, startups can establish a strong foundation for growth and success.

Traction Capital

As a Venture Capital firm that invests in early-stage, post-revenue businesses, product market fit through customer satisfaction, sales and retention is something we analyze closely. Traction Capital looks to invest in companies who have already shown success in these areas. If you or someone you know is interested in raising capital, reach out to us at ellie@tractioncapital.com. In addition, be sure to watch our Resources page for future blogs and startup events.

 

By Carrie Emslander

What is cash flow?

Cash flow management is a crucial aspect of any business, as it refers to the inflow and outflow of money. It’s the lifeblood of an organization and, if managed properly, can help ensure its long-term success. In this blog, we’ll take a closer look at what cash flow is, why it’s important, and how you can manage it effectively.

Cash flow refers to the movement of money into and out of a business. It can be divided into two categories: positive and negative. Positive cash flow occurs when a business has more money coming in than going out, which is desirable. Negative cash flow, on the other hand, occurs when a business has more money going out than coming in. This can be due to seasonality, decrease in revenue, over-extension of expenses, and more.

Why is cash flow important?

Some of the top reported reasons for small business failure are connected to cash flow management, including undercapitalization, creditor problems, and slow collection of accounts receivable.

Cash flow is important because it determines the financial health of a business. If a business has positive cash flow, it has the financial stability to cover its expenses, make investments, and grow. However, if a business has negative cash flow, it may struggle to pay its bills, meet its financial obligations, and even stay in business.

Being aware of your cash flow allows you to better reach your financial goals, adds clarity, and helps alleviate concerns around money management. This is especially true for seasonal businesses or those with large cash swings.

Being aware of aging accounts receivable gives you an opportunity to attempt collection and avoids the problem of inflated profit statements or even insolvency.

Proper cash flow management helps you make good decisions and stay afloat. With proper cash flow management, you can avoid spending more than you are bringing in by forecasting any potential shortfalls. Shortfalls can be mitigated using better timing of expense or debt payments or being prepared with a backup line of credit or loan, or requiring advance payments from customers for products or services.

Managing Cash Flow

Managing cash flow effectively requires a combination of forecasting, budgeting, and planning. Here are some steps you can take to manage your cash flow effectively:

  1. Forecast your cash flow regularly: Regularly forecasting your cash flow can help you identify potential cash flow problems and take steps to address them before they become serious.
  2. Monitor your expenses: Keeping a close eye on your expenses can help you identify areas where you can reduce costs, freeing up more cash for other areas of the business.
  3. Improve your accounts receivable process: Making sure you get paid on time can have a big impact on your cash flow. You can improve your accounts receivable process by sending invoices promptly, following up on past due accounts, and offering incentives for early payment. In some cases, requiring deposits from customers for products or services, or offering a small discount for prepayment can go a long way.
  4. Increase your sales: Increasing your sales is a great way to improve your cash flow. You can do this by offering promotions, expanding your customer base, and improving the customer experience.
  5. Plan for the future: Having a solid plan in place for the future can help you manage your cash flow more effectively. This may include setting aside money for taxes, unexpected expenses, or future investments. Companies with tighter cash flow constraints need to look at cashflow projections on a monthly and weekly basis. Sometimes even daily.
  6. Find a mentor: An experienced business owner may be willing to share their experience with you. Groups like Entrepreneur’s Organization (EO – for companies over $1M in revenue) and EO Accelerator (companies with revenues of $250k-$1M) are great resources.
  7. Find a group: Another option to solve cashflow is to work with an experienced group that not only provides financing but also has years of business experience to help guide you. At Traction Capital, we provide smart capital, are an Entrepreneurial team, and love to help companies and founders grow.

Cash flow is a crucial aspect of any business and managing it effectively can help ensure its long-term success. By forecasting your cash flow regularly, monitoring your expenses, improving your accounts receivable process, increasing your sales, and planning for the future, you can help ensure that your business has the financial stability it needs to succeed.

If you or someone you know is interested in raising capital, reach out to us at peyton@tractioncapital.com. In addition, be sure to watch our resources page for future blogs and startup events.  

By Ellie Pigott

Common Venture Capital Terms

Raising funding can be complex. Here are a few common venture capital terms for startups to know when navigating the VC world.

1. Liquidation Preference

Liquidation Preference refers to the order of which the investors in the company get paid in the event the company goes under. Typically the order is as follows; senior debt (long term loans- commercial banks, etc.), subordinated debt (seed funds, angel investor, venture capitalist and friends/family), preferred stock (investors other than the founder), and lastly common stock (founders and employees).  

 2. Deal Flow 

Deal flow describes the rate at which new investment opportunities are being presented to a company. Typically deal flow is evaluated quarterly but can be broken down and measured month to month or week by week. If a firm is experiencing high deal flow, this can make the environment more competitive for startups and make it more challenging to get a deal.  

 3. LOI (Letter of Intent)  

A LOI, or Letter of Intent, is used in the later stage of a deal process. These documents can be very broad or in some cases very detailed. The more detailed LOIs outline what a deal would look like and present the terms for both parties to agree on. A VC will offer this document to a startup they’re pursuing and once the terms can be agreed on and signed, the firm will begin the process to move the deal to close.  

 4. Terms Sheet 

Similar to the LOI, the terms sheet outlines the specifics of the deal. Depending on the depth on the LOI, the terms sheet may include a lot of the same information. A terms sheet will include details on equity, liquidation, board structure, dividends and more.

5. Pre Money vs Post Money Valuation  

Pre Money Valuation is the value of the company before the investment is made. This number is typically negotiated between the VC and the startup, as it helps to determine what percent equity the VC firm will receive. Post Money Valuation is the value of the company after the investment (pre money value + investment amount = post money value). For example, if a startup is valued at $1.5 million before the investment, and a firm invests $1 million, the pre money value is $1.5 million and the post money value is $2.5 million. When calculating ownership of the company, VC’s will base their ownership on the post money valuation.  

 6. Burn Rate  

Burn Rate refers to the rate at which a company deploys their capital. To calculate burn you can take your starting balance – existing balance / your number of months. Although burn rates vary depending on industry, a general rule of thumb is to keep your burn rate near 1/12 of your available cash. Ensuring you have enough cash on hand to make it through the year.  

7. Churn Rate  

Churn is often used with SaaS companies and apps, as it refers to the customers they’re losing at a monthly or annual rate and the associated revenue being lost. For an existing company, 6-8% annual churn is average, but for startups an average annual churn is closer to 45% (which breaks down to about 7% monthly). 

 8. Bootstrapping  

Bootstrapping is slang for being completely self-funded, or “pulling oneself up by one’s bootstraps,” meaning building the business from the ground up only using personal or family funds. This can also be shown through the flexing of personal skills and knowledge to build the business with existing resources.  

 9 . Convertible Note 

A convertible note, otherwise known as convertible debt, begins as debt in the form of a loan from an investor and later is converted to equity. The number of shares received depends on the amount of the loan, plus interest that has accrued, and whether a conversion discount is in place. A conversion discount would allow the investor to purchase the shares at a cheaper price than the current valuation, giving them an incentive for loaning money at an earlier stage. This form of financing can help the deal move quicker while also helping to avoid fees on either party (investor or investee).  

 10. Due Diligence  

Due diligence is the research done by the VC firm before investing in the company. This can be done at multiple stages in the process, and will typically include research on competitors, founder experience, traction and more. Due diligence in the later stages of a deal process will also include more financial and legal vetting.  

11. Down Round  

A down round refers to an additional raise after the previous use of funds did not yield the expected performance, or there was a change in the market. Since the company did not perform as well as expected, this next round of shares will be sold at a cheaper price. This can be seen with early startups who set their valuations too high and can range all the way to highly successful and established startups whose growth has slowed after increasing at an exponential rate. A down round is viewed as negative by prior investors as their investment has now been “marked down” or decreased in value. It is important to have the “right” priced valuations to avoid a down round.  

 12. EBIT/EBITDA Multiple 

EBIT and EBITA stand for Earnings Before Interest, Tax, Depreciation and Amortization. When determining a company’s trajectory from a growth standpoint and a return on investment perspective, the EBIT/EBITDA multiple can determine its value. The multiple used can be calculated in a variety of different ways including taking the enterprise value divided by EBIT, or by looking at the multiples of companies in the same industry or who use the same model. EBIT/EBITDA is typically used in more mature companies raising funds or exiting, as opposed to earlier stage companies raising a Seed or Series A round and may still be burning cash and not yet profitable. 

 13. Entrepreneur in Residence  

An entrepreneur in residence is an individual with experience successfully running a business, who supplies a startup with advice and knowledge on how to help their company. This can be done as a hired mentor or even make the entrepreneur in residence the temporary CEO. In the case of becoming the temporary CEO, the EIR is usually brought on by a VC firm either at the time of the investment or acquisition.  

 14. Use of Capital 

Use of capital is exactly what it sounds like, it describes how the capital will be used. This is extremely important when talking to investors because they want to know that you have a plan for using their funds in an effective manner. This can be a variety of things but the most common are growing the team through hiring, investing in building out the platform or product, scaling production, etc.  

 15. Option Pool 

Option pool describes the set of shares set aside for current and future employees. Giving key employees a small share in the company is often done as part of their employment package because startups typically cannot afford larger salaries. This helps startups remain competitive with larger companies who may be able to offer higher employment compensation.  

 

If you or someone you know is interested in raising capital, reach out to us at ellie@tractioncapital.com. In addition, be sure to watch our Resources page for future blogs and startup events.  

 

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By Ellie Pigott

Common Venture Capital Terms for Investors

Venture Capital (VC) provides an excellent opportunity to invest beyond the stock market. However, for those new to it, the terminology can be confusing. Here are a few common venture capital terms every investor needs to know when considering a venture capital investment.

1.  Limited Partner (LP)

Limited Partner (otherwise referred to as an LP), is the term for an investor who is a member of the fund. This means they have agreed to the terms of the fund, and thus are investing their money but do not have control over the management of the fund. 

2. General Partner (GP)

The General Partner is in charge of managing the money in the fund. This person is both an investor and a full-time employee of the fund. They oversee raising the capital and make the decisions where to allocate it. Although the GP does have the most say or control in a fund, in most cases they are still governed by a board which helps to approve the highest cost decisions or commitments made above a certain threshold. 

3. PortCo 

Like many terms in VC, portco is an abbreviation. Portco, otherwise known as a portfolio company, is a company that the fund has invested into. Many VCs have a portfolio page on their website where you can gain more info on the success of their portcos. If you can’t find a public portfolio of a VC you’re looking to invest in, ask if they can provide you with a few examples. 

4. Cap Call (Capital Call)

When someone agrees to be a limited partner in the fund, they agree to contribute a certain amount of money. However, this money is usually not taken all at once, but instead in (often) pre-determined increments over the life of the fund. A cap call is the term used for the announcement and collection of that predetermined amount. Because LP’s sign contracts agreeing to the terms of the fund, these cap calls can be enforced by law.  

5. Committed Capital

As mentioned in the definition of cap call, the committed capital is the amount an LP signs on to contribute to the fund. Committed Capital is the total amount the LP is contributing, and funds will almost always have a minimum amount of committed capital required to participate in the fund. 

6. IRR (Internal Rate of Return)

Projected IRR or Internal Rate of Return is an equation used to calculate how profitable an investment may be. This equation tracks both time and cash flow to determine annual growth for the investment. Since Committed Capital is called over time and not paid in all at once, IRR is typically higher with Capital Calls than if Committed Capital is paid all up front. 

7. Sidecar (SPV)

A sidecar or otherwise referred to as a special purpose vehicle, is used to raise additional capital for a PortCo with a small pool of investors. SPV’s are run by the same lead investor as the existing capital. Investors who have already invested in the existing capital through the VC fund are also eligible to contribute additional capital in the sidecar. These types of SPV’s are typically raised because the Portco has a growth need arise or because the lead investor is not covering the entirety of the raise. 

8. Carry

Carry is the term for the percentage of the profits the General Partner receives, in addition to a small management fee. The profits help the GP to cover overhead costs to help run the fund. For example, paying their team who helps identify new portcos and manage existing ones. Carry also helps incentivize good performance for the GP. Carry is typically not paid to the GP until all principal investments have been returned to the LP.  

9. Accredited Investor

To become an accredited investor, you need special designation achieved by meeting certain financial regulation criteria. There are different requirements depending on the investment, and to qualify, they may take into account your gross income, net worth, asset size, and professional experience. Being accredited means you need less protection by the SEC and it allows you to engage in investment activities not registered with financial agencies. 

10. Management Fee

A management fee is a fee charged to LPs to manage their investment in the fund. This fee is annual but is typically taken out during the cap calls. Each fund can determine their individual management rate but most charge between 2-3%. This fee helps account for operational cost and the diligence that goes into each of the investments.  

 

If you or someone you know is interested in raising capital or you’re interested in investing options like private equity or venture capital, reach out to us at ellie@tractioncapital.com. In addition, be sure to watch our Resources page for info regarding our potential investor events! 

 

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By Ellie Pigott

In the midst of a labor shortage, seeking the right talent for your startup may seem intimidating. But you might be in luck.

People are leaving their jobs because they want something new and different, and working for a startup that shares their values could be a strong point of attraction.

Attracting good talent doesn’t always have to mean fancy offices and catered lunch. We’ll outline five key things to keep in mind when hiring during this unpredictable time.

1.     Offer Remote Work

In a post-pandemic world remote working has become very normalized. In 2022, statistics show nearly 60% of Americans work at least part time remotely. While it is important to have rapport between team members, offering optional remote is a great way to keep up with today’s changing societies.

If you haven’t yet integrated this or you’re wary of committing to fully remote, offer some in between options. Set a two or three day a week minimum for in office work and let your work force determine the rest of the week.

Even if you may think your employees prefer working in person, giving them the power to choose allows them to feel like a more valued member of your company.

However, be careful when offering this, don’t throw around promises you can’t keep. If the kind of work you’re seeking requires someone fully in person, be upfront.

2.   Develop a Strong Mission, Vision and Values

More than ever, people are seeking work that they align with, not just from a skillset perspective, but with their mission as well.

Has your company dedicated time to construct your mission statement? If so, is that mission statement somewhere potential employees can see it?

Displaying your mission statement on your website or LinkedIn is a great way to show people what you’re about when they’re considering applying. It’s important that your mission statement actually holds your values. A generic mission statement isn’t any better than not having one at all.

Take Patagonia for example, their mission is to “build the best product, cause no unnecessary harm, use business to protect nature, and not bound by convention”.

People strive to work for their company not just because they have openings in product design, but because their personal values align with that of the company’s.

By having a mission statement or core values and showcasing them in your job description, you’ll be more likely to find candidates who align with your work. This then increases the chances of them sticking around.

3.   Don’t Sacrifice Values for Convenience

When the need for labor is high it can be easy to sacrifice values for a quick and easy hire. However, this type of convenient mistake can often lead to high turnover and dissatisfaction by both the employer and the employee.

Your company’s values are at the core of what you do, if you don’t have employees that align with them it’s impossible to be confident in their ability to deliver on those values to your customers.

Remember, values are soft skills that greatly affect someone’s work but can’t be taught. On the contrary, hard skills may be more directly related to the specific position but can be learned by someone who may not be an expert.

If someone is a good fit for your company but lacks some of the hard skills in your job description, consider finding ways to incorporate that needed hands-on learning in their first month of onboarding.

4.  Include Statements to Deter People

A large contributor to the labor shortage is employees being unhappy in their jobs or employees leaving their jobs shortly after accepting due to being misled.

Oftentimes the job description does not fit the reality. To help avoid this turnover many businesses are turning to “what we’re not” statements.

This sets realistic expectations with those applying. Some companies will even go as far as to include statements like “you are not the right fit if you…”. While it may sound harsh to some, you’re saving yourself time in the interview process by weeding out people who don’t meet your company’s needs.

By including “what we’re not” statements, you’re establishing a level of trust and honesty with the applicants. You’re being upfront in ways other companies aren’t and you’re saving them time that they could use to apply for jobs they might be a better fit for.

5.   Provide More Than a Salary

Fair compensation and benefits are a must, but nowadays employees are looking for more.

Consider what additional unique advantages your company can provide. This could be strategic growth, individualized mentorship, extra certifications relevant to the role, and more.

The level at which a potential employee feels they can grow as an individual may be the deciding factor between your company and another. Being “taken care of” by an employer has an entirely new meaning than it did 20 years ago.

Your company might be their next job but it’s unlikely to be their last. They want to know your company is dedicated to their growth. And when the time comes, they’ll be prepared for whatever comes next.

The Next Step

With a toolkit of good practices in mind it’s time to start drafting your job description. Remember that transparency and honesty are both at the core of finding a great new member of your team.

By being open about your company’s values, growth opportunities and offerings, you’ll be sure to find a candidate who aligns well with your role.

If you have specific questions about hiring or how to help your startup succeed, reach out to us at peyton@tractioncapital.com.

By Ellie Pigott

While a recession looms overhead, many entrepreneurs fear what’s in store for their startups and small businesses.

The Oxford Dictionary defines a recession as “a period of temporary economic decline during which trade and industrial activity are reduced” and in the last 160 years, recessions have occurred roughly every 4 and a half years. Meaning if your business plans to stick around, the likelihood you’ll have to endure one eventually is inevitable.

Although the word “recession” may sound dooming, these trying times have resulted in some of the world’s most successful and recognizable startups.

With these tips we’ll make facing a recession less stressful and help you gear up to come out on top.

1. Watch the Books

It may sound obvious at first, but for a company in its stride, it may not be top of mind. When you’re doing well it’s easy to ignore the nitty gritty financial details, but when you’re worried about the fate of your business, it’s time to pay attention.

This is the time to trim the fat and get lean.

Every cut counts, but you may be unsure of where to start and what to cut. A good place to begin is conducting a self audit. This allows you to see exactly where you’re putting your money.

Some easy cuts to start with could be subscription services your company pays for.

Depending on your type of industry, you may be able to save a few dimes in production. These saves can quickly add up, but be sure not to sacrifice the quality of your deliverable.

2. Re-Evaluate Your Loans

You would never wait and try to buy insurance until you’re already admitted to the hospital, and if you did, you wouldn’t be successful. The same goes for trying to renegotiate your loans during a recession.

Ideally it’s best to talk with your lenders before a recession is even in the air. However, with a recession looming, it’s better to speak with your lenders beforehand and try to work with them for a better rate.

Remember, you’re on the same team and neither of you wants to see your company default.

If you’re looking for more personal financial security, opening a business card instead of using your personal account is a great way to rely on loans without any effect on your personal credit score.

It’s important to remember these things take time. That’s why talking to your bank as far out as possible gives you the best opportunity to get a hold of your finances before a recession starts.

3. Diversify Your Services

You might think tough times call for sticking to what you know. While that can be true, it’s not always enough to keep you afloat.

Many great companies started with different intentions in mind. Take the 50 billion dollar company Shopify for example, they started as an online snowboard retailer and now run proprietary e-commerce all over the world.

Think about ways you can use your existing infrastructure to provide alternative services to your customer.

This not only allows for multiple streams of revenue, but it mitigates your risk in the event the market takes a turn.

In some markets, diversification can also mean differentiation. If your company can continue to innovate and grow, you’ll have a huge advantage on your competition.

4. Focus on Existing Customers

In a recession everyone will be trimming the fat, don’t let that fat be your business.

Take the time to talk with your customers, listen to what’s going well and what’s not. At the very least this will show your dedication to their business and ideally form a personal connection.

Holding on to your existing customers during hard times will allow some consistent cash flow while you focus on small steady growth.

While building these relationships, you may hear patterns begin to form. Take these to heart and let them mold the leanness of your business. There may be areas of your business you didn’t realize could be trimmed with little to know effect.

5. Don’t Stop Marketing

When looking for ways to save on cash, marketing might seem like an easy cut. But don’t be quick to jump to conclusions.

Marketing is the gas that powers your sales force. If you’re still not convinced marketing is worth the money, start tracking your marketing ROI.

Cutting your marketing budget without doing any research could lead to an unexpected drop in sales.

If you’re still looking for a way to save a few bucks, try committing more energy to your content marketing campaign. Content marketing refers to things like your social media, blogs or other resources on your website. These can be great ways to attract customers organically. On average, this type of marketing generates over three times as many leads for a fraction of the cost.

Before jumping all in, try experimenting with content marketing while still supporting your outbound marketing efforts. This will allow you to see what works and what doesn’t before allocating more resources.

Looking Forward

Regardless of the condition of the market, balancing the books, re-evaluating your loans, making the most out of your existing infrastructure, forming valuable connections with your customers and pinpointing what’s effective in your marketing, are always important.

The most successful way to make it through a recession is by being proactive, not reactive. By focusing on what’s working best, doing business in a start-up doesn’t have to be scary.

If you’ve got specific questions about how to help your startup succeed, reach out to us at peyton@tractioncapital.com .

By Ellie Pigott

For many, when they hear the word investing, they think of the stock market, retirement funds or maybe even crypto. But the possibilities don’t stop there. For those whose lifestyle can allow a less liquid investment vehicle, alternative investing is a great option. There are several vehicles to choose from including private equity, venture capital, angel, real estate, storage unit investments and more.

Here are several investment vehicles we have come across.

1. Private Equity

While private equity takes many forms, the overarching definition is investing in private companies either directly or through a fund. This can be done to gain shares of the company or to acquire the company.

Unlike the stock market, these investments have very long holding periods. Private equity firms typically exit between 3-5 years, but investors can expect waiting up to 10 years for their return.

Over the last 20 years, returns in private equity have averaged higher than that of the S&P 500. The current average PE return in the U.S is just above 10%.

2. Venture Capital

One of the many forms of PE is Venture Capital. This investment vehicle still invests in private companies but the companies receiving investments are startups with large potential for growth.

As opposed to the start-up going to the bank to receive a loan or running a crowdfunding campaign, the VC option provides the startup with both capital and expertise.

This can be extremely beneficial to entrepreneurs, especially those who lack industry knowledge in a certain area. For example, if the founder has a great vision for the company but doesn’t know much about accounting and finance, the VC firm would help fill that knowledge gap.

VC funds are typically 10 year hold periods that can extend to 12 years depending on their needs. Investors become Limited Partners (LP) in the fund and can experience tax benefits such as 1202 stock treatment, reducing overall tax liability.

VC Fund managers act on behalf of the fund to source investment opportunities, perform due diligence on companies and founders, and assist startups to growth and eventually exit.

At Traction Capital, we help connect investors with our portfolio companies that are directly related to their expertise. For some this can be mentorship, a board seat, or more, depending on the investor’s level of interest and availability.

3. Angel Investing

Similar to Venture Capital, Angels also invest in startups. This type of alternative investing is for individuals with high net worth, who provide the funds directly to the company. In most cases the capital is in exchange for equity of the company.

Because such high capital is needed, Angels typically need to become an accredited investor before investing. This ensures a level of stability and prohibits just anyone from claiming to be an Angel.

As opposed to a VC or PE fund, where a firm is doing the due diligence, this type of investment normally requires your own time and research.  To spread their risk, many Angels invest in several startups at the same time, across various industries.

Another way Angels lower their risk is by going in on a deal with multiple angels. This requires a network of trusted, well backed individuals. There are Angel networks for investors to join, some which provide deal flow, industry experience and educational opportunities.

4. Real Estate

During the pandemic the real estate market skyrocketed, but even prior, the market had been consistently climbing. Over the last 10 years the market has grown an average of 5% year after year, not including 2021, in which the market grew 17%.

Across the board, annual rate of return in real-estate has averaged 10% over the past 10 years. Investing in real estate can take many forms.

The more hands-on forms include owning a rental property or flipping a house. However, if you are looking for a hands off vehicle where your money can grow over time, a Real Estate Investment Trust, Mutual Fund, Limited Partnership, or Investment Group might be a better fit.

REITs are publicly traded shares of a commercial real estate company that owns many properties. In a Real Estate Investment Group, you buy into the fund by purchasing property, that property is then managed by the investment group. Lastly, a Real Estate Mutual Fund is an investment vehicle requiring less capital. This type of fund is more liquid, as they primarily invest in REITs, instead of purchasing property.

5. Storage Unit Investments

Just as VC is a division of PE, Storage Unit Investments are a division of Real Estate. There are several ways to go about investing in a storage facility, the main three being REITs, Self-Storage Syndicate and buying a property.

The first is the least risky and arguably requires the least amount of day-to-day work. Because REITs are publicly traded, they have strict regulations that help protect against fraud. Like any REIT, storage unit investments are great for consistent growth over a long period of time.

The second option is a syndicate. This allows investors to pool their money with other investors to purchase a facility that would then be managed by the sponsor of the fund. Like a VC fund, the investors would be LP’s, with basically no liquidity, but high potential returns.

The third option is to buy the storage unit facility and manage it yourself. Although the profits are consistently climbing, this requires a lot of upfront capital, as well as management knowledge. This option also requires the most hands-on work, as opposed to the others, which allow your money to sit and grow over time.

Next Steps

With so many alternative investing options, deciding on the right one can be challenging, confusing, and time consuming. If your lifestyle can allow illiquidity, alternative investing is a great way to not only diversify your portfolio, but to get involved with a founder or project that you enjoy and can help grow. The most important thing to keep in mind with any of the options is history and legitimacy of whatever investment vehicle you choose. Always be sure to do your research and collect all relevant data before committing any capital.

Traction Capital is a private equity and venture capital firm based near the Twin Cities. Unique from others in our industry, our entire team is made up of entrepreneurs.

As a team full of entrepreneurs that have successfully run and exited companies, we are well equipped to advise and assist our portfolio founders with any challenges that might arise.

If you or someone you know is interested in raising capital or you’re interested in alternative investing options like private equity or venture capital, reach out to us at peyton@tractioncapital.com. In addition, be sure to watch our Resources page for info regarding our investor events!

 

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By Ellie Pigott

Over the last two years we’ve watched as Covid has turned our world upside down. Virtually every industry was affected, and Venture Capital was not an exception. In an attempt to keep the economy moving while the country was at a standstill, the Federal Reserve pushed more money into the U.S. economy than ever before. Families received stimulus checks, student loans were put on hold, and even the Venture Capital world got a boost.

This led to a record-breaking raise in the VC world. Thanks to the increased amount of corporate bonds purchased by the Fed, many investors were left with an influx of cash. This was re-invested in a variety of ways, one avenue being through VCs.

With the boost of investment money, the obvious assumption might be that VC’s would be investing in more businesses. This is partially true. The number of businesses they invested in rose but not proportionally to the amount of money they raised. According to the Q4 2021 PitchBook-NVCA Venture Monitor, the total number of deals grew to 17,054 in 2021. Up 40% from 12,173 the previous year. For context the total amount of funding almost doubled during this period (330 billion raised in 2021 compared to 166.6 billion in 2020).

This enormous gap in capital and deals can be explained by hockey stick growth in startup valuations. However, as we see the light at the end of the covid tunnel, many are left wondering what is in store for valuations in 2022? While nobody can say for certain, we are already seeing startup valuations trend down. The money that helped VCs achieve their record-breaking capital will still be in their circulation but the rate new capital is being raised will slow dramatically due to the Fed taking a step back.

Valuation data is showing consumer tech and enterprise tech taking the biggest hits, while Fintech, Biotech and Pharma remain steady. Although we shouldn’t expect to see a complete drop off from the 2021 high, valuations will gradually start to dip. However, they are still expected to remain higher than pre-pandemic.

Regardless of which way the market is trending, the importance of an accurate valuation remains constant. With a valuation too high you risk getting turned away from investors before you even set foot in the door. On the contrary, with a valuation too low you risk losing money you didn’t know you had. To help improve your valuation or ability to raise funding, there are a few things to keep in mind.

  • Well Thought Out and Defined Use of Capital
  • IP or Protections
  • Barriers to Entry
  • Experienced Team
  • Clear Objectives and Plan
  • Thoughts Around a Future Exit
  • Aggressive but Attainable Projections

When presenting to any source of potential investment money, whether it be VC or not, it is extremely important to clearly define your use of capital. It needs to be visible that there is both a need and an effective use for the funds. The best way to demonstrate this is through your budget. Show your revenue, costs, variables, and any extra expenses that you foresee as your company grows.

Going hand in hand with your use of capital is your clear objective and plan. Not only do you need to show where you’re putting the money, you need to show how you’re going to make it work. Do you already have set goals and milestones you want to achieve? How will you stay on track and ensure you meet those quotas?

Consistently measuring how you stay on top of these things will be critical to your success. Part of this approach will also need to include any barriers to enter the market and any potential exit strategies you might foresee. All of these reenforce the idea that you need to be the most educated person on your industry, this will help to back your valuation.

Another important thing to keep in mind is your team. Each individual’s knowledge, expertise and experience will play a vital role in the company, especially in its early stages. It is important to make sure the gaps are being filled. The experience of your team will play a key role in its valuation. If you can prove their value to the company, you may be able to justify a higher valuation.

Lastly, be sure to include your projections. These need to be aggressive but attainable. Show your potential investor you’re a go-getter with confidence in your business but don’t make promises you can’t keep. Higher projections can lead to a high valuation but that’s only true if you can meet those expectations. Falling short of your high projections will not leave others with much faith in you or your business.

With these few tips in mind, it is easy to stay optimistic for valuations in the future. As we enter Q3 of 2022 nobody can say for certain what valuation trends will emerge. Whether valuations are on the verge of a dip or at their all-time high, it’s vital to remember the best type of valuation you can have is an accurate one. If you still have questions about valuating your company, reach out to our team. Our experienced team of entrepreneurs is ready and willing to answer any questions you have.

By Cory Kaisersatt

As many may know, the merger and acquisition market was K.O.’d in 2020 due to the COVID-19 outbreak and the economic uncertainty of the year that followed. In 2021, however, M&A made a Robert Downey Jr. circa mid 2000’s level comeback. Last year’s M&A activity hit record setting numbers in the Q4 home stretch of October, November, and December – eventually eclipsing 2020’s volume by over $2B. This can largely be attributed to two leading factors: the subsiding of the pandemic and simultaneous success of public markets.

Stability and growth returned to the markets as companies and the general public better understood how to coexist with the pandemic. This increased certainty provided companies the confidence to resume growth acquisition strategy regionally and internationally as borders began to reopen over the summer months. The success of public companies only enhanced these effects. With revenue postings healthy across the board in 2021 and public companies comprising the majority of M&A deals, companies were given the confidence and the means to “pull the trigger” on growth-driven M&A strategies.

The activity was equally as fruitful for Private Equity. An increasing amount of capital is being allocated to funds that are more specialized in their approach and address a niche, allowing for general PE coverage of a broader range of industries. The longevity of PE is also becoming more promising as funds are diversifying their portfolios into a variety of deals including leveraged buyout, growth or continuation, and pure venture.

The leading sector for M&A activity remains Tech with ESG at a distant second. Due to the supply chain and labor complications, companies are being forced to adopt new technologies faster to streamline processes, connect with customers and improve productivity. ESG topics around workforce, sustainability and underrepresented people groups are being increasinbly prioritized by the public and, subsequently, corporations. There is also speculation that the SEC will require reporting on ESG matters in coming years.

The biggest concern in the M&A market reared its head late in the year as inflation rates in the U.S. skyrocketed to 7%. Inflation at this level hasn’t occurred since the early 80’s and has many economists and market participants uncertain on economic outlooks. In an attempt to combat the inflation problem, the Fed recently announced the first of what are expected to be several rate hikes in FY 2022. This is expected to lead to increased saving rates, discount rates and borrowing costs – all of which are typically indicators of a deceleration in M&A activity.

That is a wrap for 2021 M&A. We are excited to see what is in store in the space for 2022.

In 2020, the gig economy skyrocketed.  Earnings typically increased over 50% for delivery businesses related to fast food, grocery, and physical products.