Up & Right

A couple of the most common questions entrepreneurs face are “how much traction is enough before approaching VCs?” and “how do you define traction—what are the right metrics?”

The answer to how much traction you should have before approaching VC is a fairly simple one: as much as possible. You want to maximize your bargaining power and to the extent that you have 1,000 users versus 0 or 1,000,000 versus 1,000 users this will affect your relative terms and valuation. There is no “right number” or universal metric of course as a B2B enterprise software company may have a ton of traction with just three customers but the next Facebook or Groupon killer may need 30,000 users for angels to even take the meeting. 

So once again we come back to the question, what is traction for your business? Rather than breakdown technology into a thousand and one subsectors and provide some bullshit guidance on what traction is for each (and that answer will not be universally correct as the answer will vary by investor stage, preference and the individual circumstances), here’s a way of thinking about it instead—the way VCs implicitly think about it. 

VCs, even the ones with amazing track records, aren’t very good prognosticators or futurists. VCs are really just detectives in search of evidence. We often start off with a given hypothesis in a market facing disruption, look for companies around that hypothesis and then try to pick the best one.

They key to all this for the VC is evidence. We worry that our hypothesis may be wrong or that we may “back the wrong horse.” Your job as an entrepreneur is to convince us that 1) Our/Your market hypothesis is correct (i.e. the market is worth winning) and 2) Your startup will be the one to win the market.

That’s where traction comes in. VCs want to see the numbers trending in the right direction to suggest 1) and 2) are in fact true. That’s why VCs are always looking for the proverbial “hockey stick” in user/customer and revenue growth. So I can’t tell you what traction is for your business but, like the Supreme Court judging pornography, I know it when I see it. Put yourself in a VCs shoes and think about what you would look for if you were investing in your business. Now do the same thought experiment, except you as the VC just received five business plans that are nearly identical to your original plan—now which one of those five would you invest in? Which metrics would be the key distinguishing ones? 

There’s a reason this blog is titled Up & Right. It’s not just about what a startup should ideally do once I invest, but what I like to see before I invest.

PS - Shout out to Chad Lomax, Co-Founder of Goshi.me, an Excelerate Labs startup for suggesting this blog topic.