I first heard the term “traction” in 2010 when I returned to New York City and stepped into the city’s VC world. For me, it was a new concept. Perhaps because English is my second language, I naively defined the word along the lines of OED’s first entry: “the action of drawing or pulling a thing over a surface, especially a road or track.” Little did I know. For the past three years, I found this word metric used more than probably any other when startups discuss their prospects for getting some VC money. I’ve come to despise this word. But I also started wondering why “traction” and talking about “traction” is so popular, why almost everyone in my line of work uses it as a basis for startups’ life or death decisions?
It’s easy, that’s why.
If you invest in a consumer-facing, media-centric, twitter and Facebook loving company (most are in this city and there’s nothing wrong with that), “traction” is the easiest way to measure whether the unfathomable masses will ever eventually buy what you’re selling. If they are downloading, using, and “stick” (add that to the list of hated terminology), coming to my VC decision is easy — measure growth rate, do some projections, and postulate a few theories on monetization because founders didn’t have time to to do this, being focused exclusively on traction all of the startup’s venerable six months of life. However, if they come, spreadsheet in hand, I just need to import it into the deal memo and not think about it at all and I can focus on important things, like planning my “South-by” party route. Looking at the numbers, if the acquisition costs (“CAC” (customer acquisition cost) : pronounced “kak”) is lower than the (slightly less lame-sounding) “RPU” (revenue per user), well, then it’s a winning business and we (VCs) can calculate margins, cash flow analysis, and smile that smile of superiority when we show off our Excel-finagling skills picked up during the years of (ahem) hard work in our MBA classes. We can then come up with a valuation, and tweak models to justify higher and higher prices and make sure we don’t miss the boat when the little startup showing promise becomes the next Pinterest. We can invest in an entire Excel workbook of spreadsheets, $500K a pop (or $10M if we have a $1B fund) and know we won’t miss the next Pinterest because we’re in every company that can possibly become the hot property du jour. In this world, a company that is “too early” simply means that we don’t have enough data to plug into Excel and come up with a value that others (read: our partners who have spreadsheets of their own to churn) can understand. If the company has built a product that is not just “minimally viable” but is actually good, why?, it doesn’t matter, because what does our opinion of “good” mean anyway — it’s the market that ultimately judges and we have no idea what that market actually wants.
This deferral to traction happens for three reasons:
- We know next to nothing about the market the company is targeting and needs to rely on external validation to support an investment argument. Some companies use it to their advantage by exploiting the ignorance (To quote Max Bialystock from The Producers: “…next, we raise a million bucks. There are a lot of old ladies out there”. There are companies targeting “moms,” “kids,” “moms with kids,” “seniors,” , “seniors with grandkids, “(fill in the blank) enthusiasts,” “(fill in the blank) patients,” etc. But the sad thing about the VC business is that most VCs are white, middle-aged, wealthy males. It may be sad, it may need to change, but it’s true. They may or may not have kids, but their kids usually go to private schools and worry about which Ivy League to pick. Investors do not intuitively understand what the majority needs, wants, or cares about in this country, and forget about the rest of the world. Eureka… traction. If moms are buying, it’s a good product for moms and I can make my quantitative arguments. If the company eventually does well and some CEO celebrity with a monosyllabic moniker buy it, I’ll be branded an “expert” in “mom” products and, magically, mom companies will flock to my office — think about it, we all have a mom. And think of all the moms in China. What the successful company did can be copied, morphed, enhanced. I can see that Ferrari from my yacht once I become the guru all the world’s moms crave. And I don’t have to become a mom to do that — I just want cells in a spreadsheet. I want traction.
- The company’s product is so inane, that we have no idea whether anyone will actually buy it, whether it serves any purpose, or has any reason to exist other than the founders own frustration with some trivial aspect of their life. Yes, quickly paying a beer tab at a bar is a high-class problem we all face in our daily slog through life (there are companies, plural, not just one that see traction in that market). So is splitting a pizza bill with my friends (though I haven’t done that since junior year in college — 1987). So is sending $5 to my buddies though a mobile phone though most would prefer a $5 bill once the novelty of having a mobile phone wears off. Witness “iFart” — a $0.99 bit of App Store idiocy that, had and, apparently, continues to have quite a does of this mysterious “traction.” Whether the company plans to release a series of other flatulence-focused applications remains to be seen, but you never know. However, imagine iFart walking into your office asking for money for “the idea.” What would you do? Yeah, probably shake your head and tell them to come back when I can get my CAC and RPU figured out. And then… you know the lines: team is great, idea is great, concept is interesting, ad infinitum, ad nauseum. I can take the stage and explain on light-flooded stages how I heard the magical melodies the app makes the first time I met the geniuses behind it at some meetup. And the geniuses themselves will later become angel investors and start giving advice, and hopefully there will be more and more iFarts for the new generation, waiting in nurseries today to become tomorrow’s traction.
- The team — well, if there’s traction, they must know something and can be labeled by the ubiquitous “good” or ever more meaningless “great.” In my opinion, few individuals are actually great, and even fewer teams are great — it’s hard to be great especially in groups where laws of averages inevitably pull toward the mean. The seemingly exponential increase in IQs and business savvy over the past two decades continues to amaze me — an army of “great” men and women whose epiphany came when they figured out that it’s easy to hack Node and deploy to EC2 tossing in a few D3 graphics to spice things up. Everyone seems to have gotten a lot smarter, better, greater, savvier, hipper, more agile — nor like the ancient days 10 years ago. Ummm, I don’t think so. People are still people, and unicorns are mythical. But with traction, the team matters less — again, they must be doing something right. And hey, they can always be swapped out for “business guys” or marketers as long as the masses I don’t understand from point #1 above, keeps buying (figuratively first, and perhaps literally some day).
So, the three pillars on which every investment evaluation should stand: market, product, team (in that order), flex to support a market anomaly we don’t quite know, the product we don’t quite care to understand, and a team that is “good enough.” As an investor, what lessons can I draw from this “traction” obsession? What can companies that want me in their future expect? Am I going to welcome anyone with an idea and no proven market traction into my office? The answer is absolute and certain: NO. Three years into this business, I think I can make some choices about which companies should even be considered (quality deal flow, my greatest fear when starting this career, is definitely not a problem). Here are my rules, take them as you will:
- I have to understand your market — deeply understand it. And I don’t claim to deeply understand that many. So, if you have an app for “moms” — that’s great, I have a mom, but I know nothing about how moms think or buy. If you have an app for “kids” — sorry, I don’t have any kids and don’t want to know about the business of appealing to them. I don’t know healthcare, I don’t know cleantech, and I don’t really know fin tech (no matter how much CNBC I watch). I don’t have a bunch of senior partners at my firm who hired me under a false assumption that I will be like them — knowledgeable about everything under the sun (which, come on, isn’t true for them either, they just start to believe it, forgetting that true encyclopedists (Jean Jacques Rousseau, Isaac Asimov) are no longer with us). With no one to impress I can dare to say thing like: “Look, I have no idea about the problem you are solving and never really cared about it, I don’t understand you or what you are trying to do or tell me.” When something is not interesting to me I don’t pretend otherwise with a smart look on my face and peppering my sentences with the “interesting” adjective. That doesn’t mean that you’re not solving a real problem, or that your idea is not worthy — it’s just not a problem I choose to lose sleep over. There are some markets “tangential” to my core expertise (enterprise IT) which are a better fit. But I will be the first to say that “I know enough about software security to know that I don’t know enough about security.” Same goes for networking…. but at least I know people who do and know the customers who buy these products. Most people getting started and proving themselves in my business, surprisingly, don’t feel that; they think that their MBA , a degree in “general management” (whatever that means), is reason enough to disregard Alexander Pope’s “a little learning is a dangerous thing…” What little learning when you majored in econ at Harvard? Pope wasn’t in the curriculum and didn’t even have Twitter followers.
- The team matters, colleges matter, majors matter, blue-chip companies where people worked matter, industry experience and respect matters. There are examples of savants that never finished high school or dropped out community colleges and went on to greatness. But looking for them is like playing slots — you can win big with a $1 bet. And that’s not what I’m paid to do. I want to improve the odds, not look for anomalies. Get an education, get some solid experience at a real company, than start something. I know, I know, there are plenty of counterexamples. But, I’m not investing in probabilities. Also, you and I need to work together for the next seven to ten years — and that will be impossible if I just don’t like you or you just don’t like me. Hard to believe, but some people just don’t like me :-). Doesn’t matter how sweet the opportunity may be — no one is arranging this marriage.
Those are my rules and I am not saying they are right for everyone. I am not saying everyone else is wrong. I’m just old enough to walk down my own road. This is a post for companies, not VCs. So, startups, back to basics: market, product, team, deal. And save your “nothing matters, look at our traction” decks for someone else. Oh, and I hate decks too, but that’s another blog post :-).