RAISING MONEY? ARE YOU TALL ENOUGH?
“Fundraising is hard. The chances of you closing money from any given VC fund are smaller than becoming a Rhodes Scholar, getting into Harvard, or qualifying as a Navy Seal.”
There are four variables that drive a deal: traction, product, team, and social proof. Product, social proof and team are far seconds. Investors care most about traction.
We frequently hear, “Traction trumps everything,” but like all cliches, the phrase conceals what makes the idea true.
Traction is traditionally defined as “quantitative evidence of customer demand”. This definition, however, is probably more deceiving than helpful. Traction’s meaning is relative’ it’s a target that is always moving. Naval Ravikant, founder of AngelList, illustrated this concept during his PandoMonthly fireside chat:
[In November 2011] you could have gotten your mobile app company funded with ten thousand downloads. [In November 2012 it would have taken] a few hundred thousand downloads and a strong rapid adoption rate for a real financing to [have taken] place.
Think of traction like a height requirement for a rollercoaster ride. You can stand in line if you so choose, but you will not be able to ride if you are too short. Most likely, it won’t matter who you are with, what you have with you, or who believes in you— you have to be so tall to ride. There are exceptions, of course, but these are very rare.
Here is a way to guesstimate how tall your startup needs to be. I would examine this thoroughly before you begin building a product.
- List your current competitors and start by looking at those closest to your situation. If you are raising a seed round, look at those who have most recently completed their own round and find their numbers.
- Sometimes startups will list their traction data on venture profiles, but more often you can find them in press coverage. Lets say we discover that they raised $500k at a $2 million post-valuation with 30,000 app downloads.
- Adjust those numbers.
- If they raised money from the same venture capitalists that funded the wildly successful startup they previously worked at, give them bonus points.
- If you are currently web based -conversions are harder on mobile- give them more points.
- If they raised money a year ago, then those numbers are not stagnant. Plus, they may be the new standard that you need to outgrow in order to be meaningful. Give them more points.
- Repeat and adjust for all cases that may arise. This is by no means an exhaustive list. Don’t worry about your numbers being wrong. Just make sure they are too high. It will push you to grow.
You should now know approximately how tall you need to be, or, in other words, how many active users you will need. Growth will be your product’s compass.
Here is a panel I moderated on the topic at Philly Startup Leaders’ Founders Factory.
