WTF is Traction? A 6-Step Relationship Guide to VC

Posted on Aug 8, 2009 | 20 comments


iStock_000009170146XSmallThis is part of my ongoing series on Raising VC.

You’ve pitched several angels and VC’s.  Everybody seems to like you but nobody seems to be getting out their checkbooks.  Most of them are telling you that they just need to see a bit of traction before they’d be prepared to invest.

Your friends and advisers tell you that this means you need revenue because in this economy VC’s will only fund businesses with revenue.  Unfortunately your advisers are wrong.

The “more traction” feedback is a very typical scenario is a down market economy like the one we’re in.  Investors are giving you a version of the “soft no,” which basically means that they’re not prepared to invest now.

So if it’s not necessarily revenue that’s preventing an investment, then WTF is traction?  Unfortunately there is no real objective measure.  Traction can simply mean showing that you’re making progress with customers, product development, channel partners, initial revenue as a proof point, attracting well-known angel investors, winning industry awards / recognition.  It is code word for “I’m not ready to invest for whatever reason … I need more proof.”

Now there are some firms that have strict rules about not funding pre-revenue companies – that’s different.  But many Series A firms tell people they have a “revenue rule” and then you look at their portfolio and see many exceptions.

Traction really is about building a relationship with a VC over time and showing them that you can move the ball forward.  Many entrepreneurs make the mistake of thinking that funding is something you do in “funding season,” some mythical  2-month period when you’re ready with a great Powerpoint deck and you hit up all of the VC’s at the same time so that you can quickly raise money and get back to the job of building a business.

Fund raising is an ongoing process and not an event on a workplan.  You need to build a relationship with investors over a long period of time.  That is how you convince VC’s that you’re gaining “traction.”

6 Steps to Building a Relationship with VC’s and Solving the Traction Problem:

alec baldwin1. Always be Pitching (line stolen from my favorite scene in one of my all-time favorite movies. At 3:15 here if you’re interested).  Go see a few select VCs before you’re even ready for institutional money.  Tell them about what you’re up to in your business, show them your product or prototype, tell them your strategy, talk about the deals you’re working on and seek feedback.

If you wait until you’re “ready” to fund you’re too late.  Funding is about developing a relationship over time.  Most of us wouldn’t get married on the first weekend we met someone in Vegas.  And most VC’s wouldn’t fund the first time we meet you.  Given that many VC’s base their decision on the team, the longer they have to get to know you the better.

2. Over deliver - The people who get funded are the people who actually get things done.  They tell you that they’re working on biz dev deals with distribution partners and they get the deals signed.  They tell you they’re going to ship product and they do.  They get their widgets embedded or their products piloted.  They hire key staff.  They get positive product reviews on TechCrunch, GigaOm or Paidcontent.org.  They make progress.  You need to over deliver and communicate back with VC’s showing the progress you’ve made.

radarScreen-7194853. Keep on the radar screen – I know the VC’s seemed to love you when they met you.  The problem is that they see hundreds of pitches and they often don’t proactively step back and think about the companies that seemed promising but they weren’t ready to pull the trigger.

You should send “update emails” that are very short but highlight some of the achievements you made with the intro saying, “since you showed interest in my company I just wanted to provide you a brief update on our progress.” This is important because it keeps you at the top of the stack in their memory.  It’s marketing 101 for tech companies in terms of how you market to customers.  You have buyers who are ready now and those that aren’t.  Sales owns the former, the latter get marketing emails so you’ll be top of your prospects’ minds.  VC’s are the same.

4. Find ways of helping the VC – If as an entrepreneur you get to know other interesting entrepreneurs / companies it is a good technique to send intro’s the the VC and ask if they’re interested in meeting the company.  I usually recommend that you send the companies Powerpoint deck and ask the VC if they’re interested but don’t necessarily copy the company on the email until the VC says he/she is interested.  If they’re not at a minimum you’ve shown that you’re thinking of them and you’ve stayed on their radar screen.  It’s not required but I have seen this technique be used effectively by entrepreneurs.

5. Schedule a follow up meeting. Contact the VC again when you’ve signed a few more big deals. In your email to the VC tell them about the additional progress you’ve made and ask for a short, 30-minute session to update them on the business.  Don’t take no for an answer.  Show some chutzpah.  But be polite.

You might find that you get a “we’re really not interested” response.  That’s OK – at least you’ll know to cross them off the list.  When you do get a follow up meeting tell them about your new revenue model, ask to show your new demo, talk about the progress you’ve made and what has turned out differently then expected.  Update them on your fund raising progress.  Seek more input from them.

Stick to your 30 minutes so you build the trust that every time you come back you don’t abuse your time commitment.  Leave them wanting more.   Don’t come back with fake progress.  If the businesses isn’t getting “traction” then probably best not to come back with a bad impression.  Your time is better spent actually making progress.

lather6. Rinse and repeat – When you do raise a round, start immediately building the relationship with VC’s who do B rounds.  Some of the masters at this VC relationship business are Jason Nazar  (DocStoc), Jon Bischke (EduFire) and Ophir Tanz / Ari Mir (GumGum).  In the latter case, every time I saw them they had moved the ball forward and evolved their strategy.  After more than a year of updates I pulled the trigger and invested.

We all build relationships over time.  Doing an investment is more permanent then marriage – there are no divorces for irreconcilable differences.  I know that in a booming market people fund quickly.  And I know many stories of Benchmark or similar investors writing term sheets after the first meeting.  But I also read stories about people winning the lottery.  Neither is the norm.

  • Shane

    Hi again Mark,

    Thank you again for another very informative, interesting post. It is always hard to find someone to tie down the traction question. I have another question for you. I have heard through a couple of sources that it is important for you not to approach the investor too early, in that you could potentially lose face/credibility if you are not prepared. I have disagreed with this logic in the past, and it seems that your post echos my personal sentiment. In your opinion, would an entrepreneur who approached you very early on seeking advice/guidance with the possibility of later funding lose credibility by approaching too early?

  • Shane

    Actually, I misspoke in that previous question. Obviously, if you are totally unprepared, you will lose credibility. What I meant to say is that you would be unprepared in the sense that you are too early to receive funding at that particular point in time.

  • marksuster

    Shane, I think you’ve answered the question for me! Yes, it is too early to approach a VC if you aren’t prepared. You do need to get a deck together that explains what you do or plan to do. In a perfect world you’d have a prototype of a product or at a minimum wireframes and an HTML mock-up. You should have the formation of a small team. But you should definitely go and see VC’s before you’re looking for money from them. Thanks for your input.

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  • Shane

    Great! Thank you for clearing that up.

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  • http://www.pipit.com david fishman

    Simple as A B C – Always Be Closing

  • Rajat

    Great post again Mark. One tip I heard from a CEO who’s raised a few rounds is: keep VCs involved by getting them to do things for you. This could be an intro or some research. A quid pro quo helps to build the relationship and keep the VCs engaged (and feel like part of the team)

  • marksuster

    Yes, but make sure that what they are helping with is very easy and straightforward. I am usually eager to help. But sometimes I get 5 paragraph emails with 6 things that I could do to help. Not knowing where to start, I normally file it away and don’t action. If somebody asks for one small, easy favor and I liked / respected them I’ll usually try my best to oblige.

  • http://www.cleencell.com Nima Sharifi

    Great post Mark. Oh the ‘traction’ response…I’ve been raising money since the concept stage (2 yrs ago), and still haven’t stopped (post-revenue but under $50k). Investors are indeed impressed when they see significant meaningful progress. Next steps: hire CMO, get distribution, proof market even further (i.e. more traction). ABC indeed.

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  • marksuster

    It never ends ;-) but glad to hear you’re making progress. Good luck in your progress. ABC

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  • http://nerdbusiness.com/ Schwabe

    quote: If you wait until you’re “ready” to fund you’re too late.

    I'm pleased to uncover this tip. With a couple of bold business visions on the horizon, my traditional thinking has been to wait until 'we reach that stage'. When all the ducks are in a row; when we've got a sexy 2 hour DVD presentation, diagrams, and a polished business plan before even approaching a VC.

    As you point out, it's like marriage. To share another analogy, it's like launching a new product. If you wait until your product is manufactured before initiating your marketing strategy, you've already missed out on the opportunity to spread awareness, gather leads, and build 'launch hype'. In the context of raising capital, your 'business plan' is the product and your customers are VCs. Plant the seeds early and on 'launch day' the VCs might be coming to you.

  • http://nerdbusiness.com/ Schwabe

    quote: If you wait until you’re “ready” to fund you’re too late.

    I'm pleased to uncover this tip. With a couple of bold business visions on the horizon, my traditional thinking has been to wait until 'we reach that stage'. When all the ducks are in a row; when we've got a sexy 2 hour DVD presentation, diagrams, and a polished business plan before even approaching a VC.

    As you point out, it's like marriage. To share another analogy, it's like launching a new product. If you wait until your product is manufactured before initiating your marketing strategy, you've already missed out on the opportunity to spread awareness, gather leads, and build 'launch hype'. In the context of raising capital, your 'business plan' is the product and your customers are VCs. Plant the seeds early and on 'launch day' the VCs might be coming to you.

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  • PK

    Sounds like an investor with little innovation, a lot of exploitation just waiting for everything to be ready for them while they make maximum profits on ready work. Its a form of cheating someone else, really. If the investor is overly suspicious all the time, you sort of have to question his own ethics.

    I prefer the story about the young Skype creators, who walked up to their investment groups office with no plan, no income, not even a product in place. Their ideas were basically dotted down on a paper napkin but the investors didn't demand sheets and sheets of accounting, business plans, and what not. Instead they could see a potential only in the concept, and helped them create a plan, develop their business and fund them. Everything else is history.

  • PK

    Sounds like an investor with little innovation, a lot of exploitation just waiting for everything to be ready for them while they make maximum profits on ready work. Its a form of cheating someone else, really. If the investor is overly suspicious all the time, you sort of have to question his own ethics.

    I prefer the story about the young Skype creators, who walked up to their investment groups office with no plan, no income, not even a product in place. Their ideas were basically dotted down on a paper napkin but the investors didn't demand sheets and sheets of accounting, business plans, and what not. Instead they could see a potential only in the concept, and helped them create a plan, develop their business and fund them. Everything else is history.

  • http://bothsidesofthetable.com msuster

    Sure, there is a good analogy to building a product. Get out early and test it with the market. Same with VC.

  • http://bothsidesofthetable.com msuster

    PK, just make sure you get your facts straight. The Skype founders had founded a tremendously successful product called Kazaa before founding Skype so when they raised money they had a huge reputation. And because I know people who worked on the original financing I can tell you it wasn't a paper napkin and money on day 1.

    If you think that somebody should fund a paper napkin with somebody they are meeting for the first time and where the entrepreneur has no track record you mistaken. Or if they do, I feel sorry for the people who invested in that person's fund. Would you invest your personal money this way? No research? Please.

  • http://bothsidesofthetable.com msuster

    Sure, there is a good analogy to building a product. Get out early and test it with the market. Same with VC.

  • http://bothsidesofthetable.com msuster

    PK, just make sure you get your facts straight. The Skype founders had founded a tremendously successful product called Kazaa before founding Skype so when they raised money they had a huge reputation. And because I know people who worked on the original financing I can tell you it wasn't a paper napkin and money on day 1.

    If you think that somebody should fund a paper napkin with somebody they are meeting for the first time and where the entrepreneur has no track record you mistaken. Or if they do, I feel sorry for the people who invested in that person's fund. Would you invest your personal money this way? No research? Please.

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  • romytaormina

    Great suggestions. Thank you for your insight!

  • romytaormina

    Great suggestions. Thank you for your insight!

  • romytaormina

    Great suggestions. Thank you for your insight!

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