The lexicon and jargon of the venture world is a frequent topic of articles and posts. It changes year-to-year, or with each up and down cycle. In the mid to late 90′s the buzzwords were “eyeballs,” “paradigm shift,” “new economy,” “bricks-and-mortar” and the ever present “synergy.” During the latter half of 2009 up to the present I’ve noticed that many of my conversations with VCs and angels have included the term “traction” when talking about fundability of a company. At one point this was called “validation.” Traction is an important concept to understand and the first step is to realize that it means many things to many people. See Fred Wilson’s view of traction, Venture Hacks’ view of traction, Guy Kawasaki’s view of traction, and Mark Suster’s view of traction. Traction can mean revenue (how much depends on who you speak to), profits (infrequently), customers or users (either buying, browsing or registering some level of interest) or just a working model. A common thread through most definitions is usually a working product and customers. As with all things, rules have exceptions and you will occasionally find angels or VCs willing to make them in the case of traction. If you are an entrepreneur that an angel or fund has successfully backed before then you may be funded prior to obtaining traction. Past success breeds confidence in this area.
If you hear the traction response from an angel or fund, don’t fret. It does not mean the door is closed, but it does mean that they need to see more. Ask lots of follow up questions to find out how they define traction and what exactly they are looking for. Be specific. The more info the better if you hope to return some day and demonstrate how you’ve overcome this hurdle.
Traction is sought for a reason. The more traction that exists the less risk that is present. This topic touches on another issue I see out there -the fact that there seems to be less and less true early stage investors. There used to be a subset of early stage funds that did concept stage deals or pre-revenue rounds. They wanted in before a company validated their model. They bet early and were paid handsomely with great valuations. To some degree these days are gone. Investors can now get those same valuations but at later stages. That is, they are investing in companies with lots of traction but at lower valuations. VC funds need to obtain returns for their LPs, so investing later at lower valuations is a smart strategy. If you are an early stage company looking for funding, you may feel differently. Even angel investors are joining other angels and funds and syndicating later stage deals. A sign of the times? Yes. Built to last? Not likely. Not if anyone wants there to be middle and later stage technology companies to invest in during the next few years. If no one is backing concept stage companies, no such later stage companies will exist.
Chris McDemus is founder of VC Deal Lawyer, a blog devoted to providing insights on start-ups and emerging growth companies. Chris is also founder and owner of MCD Law Partners, LLC, a boutique law firm focused on providing corporate, transactional and operational legal services to start-up and emerging growth companies.