Generally, investors are looking for a proven team, proven technology, and an established market. However, one factor cuts through all the hyperbole: actual sales. (In Silicon Valley, we call this traction—in the sense that a tire grips the road and moves a vehicle forward.)
Traction counts the most because it demonstrates that people are willing to open their wallets, take out money, and put it in your pocket. If you’ve been able to accomplish this, your team, technology, and market are less important. I don’t know of an investor who would rather lose money on a proven team with proven technology in a proven market than make money on an unproven one.
This is also why a successful crowdfunding project is robust. It may not only eliminate or delay the necessity of fund-raising; it can provide proof of the viability of your product and help attract investors. Traction takes complicated forms in different industries. It has a straight forward definition for a startup with product or services:
Number of registrations
Number of downloads
Number of paying customers
Not for profit have different parameters:
Schools: enrollment and student test scores
Churches: attendance at services
Museums: number of visitors
Volunteer organizations: contributions and number of volunteer hours.
This raises a logical question: “How can I show traction if I don’t have enough money to finish my product?” There are two answers. First, no one said entrepreneurship is easy, “The Art of Bootstrapping,” and do what you have to do. Second, there is a hierarchy of traction with all due respect to the Maslow hierarchy of needs.
Actual sales (or the parameters discussed above for nonproduct companies)
Field testing and pilot sites
Agreement to field test, pilot, or use before shipment
Establishing contact to pursue a field test
This is the pecking order of desirability. If you don’t at least have a contact for a field test, you will have difficulty raising money. Many entrepreneurs believe that saying, “I believe in my idea,” is a traction form. They are deluded if they think this is true.
Every—literally every—entrepreneur shows up at investor meeting with slides that “prove” his market size. Usually, the slides contain a quote from a consulting firm stating unequivocally that the size of the llama ranching software market will be $50 billion within the next four years.
The funny thing is that all entrepreneurs claim that they’re going after a $50 billion market. However, no one in the room, even the entrepreneur, believes the number or thinks it’s relevant. A better method is to catalyze fantasy. You do this by providing a product that is so needed that the audience can do the math in their heads. This method won’t work in all cases because some markets are not prominent, but when it does, the results are spectacular.
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