Within the VC industry, the term traction is used as a shorthand way of referring to how much momentum a startup company is starting to generate. The more traction you have, the more likely that your startup company will have enough momentum to make it to the next round of funding.
From the perspective of a venture capitalist, anything that a startup can do to mitigate risk and increase value is a net positive. That's why traction is so essential – it helps to demonstrate that your startup is not as risky as others might think. Often, venture capitalists will turn down a potential VC deal, and give as their reason that a company has failed to demonstrate any real traction (or staying power) in the marketplace.
With that in mind, there are various ways to define traction. The most important kind of traction is revenue traction. This demonstrates to a VC investor that customers are starting to pay for your products, and that you have a solid enough value proposition that more and more people are doing this. Another kind of traction is customer traction. Even if these customers are not yet "paying customers," the fact that people are signing up for your service, app or product in droves is a very positive step forward. With a little marketing magic, you might be able to convert those unpaid customers into paid customers.
And that's not all – you can demonstrate traction through signing up partners, vendors or affiliates. For example, if you have recently signed up a high-profile partner, that too can be seen as a sign of traction. It might take a few months to transform that partnership or alliance into revenue-generating activities, but if the name brand of your partner is big enough, that's a sure sign that you are one step closer to profitability.
You can also demonstrate traction via media attention and other forms of free PR. If industry bloggers are writing about you, if the local TV station wants to interview with your founder, or if tech media publications are starting to mention your company, that's also a sign that you are gaining traction. The same is true if industry associations or local chambers of commerce are partnering with you.
Finally, you can demonstrate traction through social media. If there is a grassroots buzz about your company, that's a positive sign that you are starting to gain a consistent customer base. That's one big reason why so many companies are working with social media influencers – getting someone with 10,000+ followers on Twitter or Instagram can be a great way to demonstrate that your product or service has broad, popular appeal. The same is true if YouTube vloggers are talking about your products.
Traction is closely related to some other key terms in the VC industry, including churn and MRR (monthly recurring revenue). If MRR growth is high, then you have traction. And if churn rate is low, then you also have a solid basis for ultimate traction. In short, traction is proof that your company has a strong base for future success.