Unlike momentum as explained by your old physics teacher, momentum in business cannot be measured scientifically.
There is no standardised formula for what may seem, to the potential startup investor, an abstract force.
But it must be gauged as accurately as possible – and shown to be relatively high – before any investment can take place.
Startup momentum is not completely devoid of scientific investigation for investors to draw upon.
Back in 2003, researchers (Le Brasseur and colleagues) took an academic approach to analysing momentum in 145 new ventures.
They sought to explore factors affecting growth momentum as measured by sales. Their main focus was on the correlation between pre-launch activities, planned and actual business expansion and early stage performance.
They found that sales in year two were positively impacted by “the breadth of pre-startup activities”, and the range of “expansion activities”
This suggests that startups with wide ranging marketing plans, targeting diverse customer groups or markets are more likely to thrive. Meanwhile, the more reliant businesses were on the technical skills of the owner-manager, the worse the business generally performed sales-wise.
Perhaps this is useful information for an investor; an entrepreneur working too much in, rather than on, the business may well be a resistant force to momentum.
The last line of the research’s published summary is perhaps most telling for investors:
“The study revealed a consistent gap between owner-managers' expansion intentions and actual expansion.”
Business plans only explain what the founders aim to do. Momentum is one of several important measures that help the investor to assess how likely it is that these plans will come into fruition.
Of course, traction in a business does not necessarily mean commercial wins and rising revenues.
Embryonic startups, for example, may have no live sales data to show off. In measuring momentum, investors, must clearly factor in the context of where the startup is on its roadmap.
For early-stage firms, instead of sales, they may look for signs of an increasingly engaged pool of future customers.
This may be challenging in pre-trading businesses. The founders may still be embroiled in building the foundations of the business. Steps they are putting in place today may well be the catalyst for rapid momentum tomorrow. Predicting that as an investor can be incredibly difficult and careful analysis, with a dose of well-honed intuition, could be required.
Signs of engagement vary widely from sector to sector. The truly disruptive startup may be engaging customers in ways you’ve never come across as an investor.
Various online metrics of engagement exist within web traffic stats. Visitor numbers, bounce rates, pages per session and length of session are a few of the many indices on traffic-monitoring platforms such as Google Analytics. Off-site, a growing social media audience is another gauge of momentum.
Often press coverage is presented to investors as a further sign that the entrepreneur is making inroads into the market.
Certainly, it is one of many factors to consider in measuring momentum.
However, as quoted in US business magazine Fast Company, Ben Joffe of global venture capital group SOSV, warns:
“Some founders try to impress us with media coverage, YouTube views, awards and prize money [but] awing readers or a jury is not the same as building a product that will actually sell.”
Investors should also look out for the precursors of lost momentum. For startups with a trading history, dwindling customer numbers are an obvious sign.
A slightly subtler red flag is a falling level of engagement with existing and potential customers.
Online evidence of this might include reduced web traffic, more people clicking ‘unsubscribe’ and less social media chatter about the brand.
A crucial element of the startup’s momentum is successful marketing. Customer messaging should be consistent and deliver results. If the cost of customer acquisition – in terms of time and money – is more than the customer’s lifetime value to the business, momentum will suffer.
Adaptability is also important in maintaining progress as a startup. Being responsive to both challenges and opportunities is a basic requisite of the successful entrepreneur.
Is momentum likely to be stifled by a rigid approach or the inability of the founders to take advice and new ideas on board?
As a prospective investor it is also important to recognise that not all startups have to move forward at breakneck speed to be successful. Some will grow slowly but steadily and deliver excellent returns to the patient investor.
In earlier days, Facebook’s developers famously worked to the mantra “move fast and break things”. The sentiment summed up an attitude of putting the creation and launch of new tools ahead of fixing their bugs and flaws.
This worked well in Facebook’s journey to world domination. But in 2014, things changed, as Mark Zuckerberg explained at the time: “What we realised over time is [the mantra] wasn’t helping us to move faster because we had to slow down to fix these bugs and it wasn't improving our speed.”
“Move fast and break things” became the less catchy “move fast with stable infra”.
Facebook’s lesson offers a note of caution to the startup investor.
Are activities which are being presented as signs of momentum actually examples of a company rushing ahead, without building a model for sustainable growth?
The poster boy for the stoic approach to startup building is Jeff Bezos, reportedly the richest man on Earth. In 2003 his company Amazon registered its first full-year profit – nine years after launching the business.
Clearly Amazon would have oozed momentum in its infancy as it blossomed from an online bookseller into a global phenomenon. Its path to profit, however, shows that also in abundance was long-term planning with near-constant reinvestment in building a more robust business and continually adapting to market forces.
Momentum, then, is best measured as one of several key factors of startup success. Investors may wish to consider momentum as one of the so-called 5Ms of startup investing. The other Ms on that list – which sets out the essential considerations of the prospective startup investor – are Management team, Market, business Model and Money, and combined cover all of the key parts of a startup investment opportunity that need to be effectively considered.