The Tyranny of Traction, Apparent “dumbing down” of seed investing…and how to fight it
An Indian enterprise startup recently announced that it has reached 6,000 customers. The company is listed in pretty much every “top Indian startups” list. Genuflecting blog posts have been penned venerating how this company is a master of marketing especially so when it has only five employees, all of whom are engineers and has achieved this traction without spending anything on sales and marketing.
There is just one catch though – the company is still not profitable. If it boggles your mind as to how a company with just three employees (the other two are founders) and which spends nothing on marketing can be unprofitable despite several thousand customers, join the club!
The answer lies in the subtle sleight-of-hand: the plans offered by the company include a plan that is completely free, so the vast majority of “customers” are those who don’t pay a dime. They are therefore customers only in the loosest sense of the word.
So is the company lying or trying to deceive people by tom-tomming these numbers? Probably not – for all I know, they are perfectly decent people just trying to make an honest living.
The answer as far as I can see it is that this startup, like many others, is a victim of what can be called the “tyranny of traction”.
Everyone from angel investors to seed funds to accelerators are shouting from the rooftops that “traction trumps everything” or variants thereof – “lead with traction”, “traction is the only intellectual property you have”, so on an so forth. While there is no definitive definition of traction, what is essentially implies is that there is some market demand for your solution and this is ideally measurable and demonstrable.
There has always been a school of thought that traction is important when raising funds but traditionally, this lens has been applied for later-stage funding (typically Series-B and beyond). But now, it seems to have fashionable to talk of traction for all stages of investment including seed. What’s more, not only are they saying that traction is important, they are seemingly saying that if you want to raise seed funding, traction is the most important ingredient. That this one facet “rules over” anything else that you can say or show while you present your case. This overriding emphasis on traction is what I refer to when I say “tyranny of traction”.
I have not heard a single voice declaiming this school of thought and quite frankly, it astounds me that this aphorism that “traction trumps everything” has been taken as gospel by many.
Admittedly, it has been a while since I personally scouted for funds for my company and all of this makes me feel rather like Rip Van Winkle waking up after a longish siesta to a world that has completely changed around him.
So at the risk of being labeled an anachronistic dinosaur, I feel compelled to offer my 2 paise that traction is an entirely wrong aspect to focus on when you go about attempting to raise a seed investment for your startup.
What is wrong with focusing on traction at a seed stage?
A seed-level startup is not a miniaturized company.
Just as a seed is not a miniature tree, a startup is rarely a miniature company. Funding at a seed stage is rarely intended to provide “scale-out capital” where you already have all the ingredients in place and it is just a matter of linearly executing on your preset plans. Almost every startup is initially an experiment where there are far more unknowns than there are certainties.
And at this point of time, the seed funds are required to fill out your team, experiment with business models, build out your solutions and initiate go-to-market efforts. Focusing on trying to show traction before doing any of these things essentially means that you have run of risk of missing the wood for the trees and prematurely setting your company along a path that is potentially sub-optimal in many ways.
Achieving true traction takes time…and money.
I can see why at least some people have started using traction as a key metric – the cost to start a tech company and enter the market is lower than at any time in history. So there is a temptation to conclude that it follows that it is also easier to achieve traction. Unfortunately, in all but the rarest of cases, this is not true at all – while it might be indeed cheaper to develop a working prototype, it still takes time to fine-tune your offering to a meaningful point (typically 3+ full iterations), hire new members to your team, get into the market and make yourself heard above the din of a thousand other startups itching for their respective places under the sun. If you have managed to achieve true traction without requiring to raise seed investment and if you still need further capital, then I would argue that you could just as easily raise money from an institutional investor (or indeed a bank) rather than go to an angel investor or seed fund.
The lure of false proxies.
Most of what startups claim as traction involve false proxies that are palatable to media imperatives – they are not true measures of the value that you bring to your customers. For instance, the use of “number of customers” by the company mentioned earlier is a false proxy – now the company probably has a few hundred rather than six thousand paying customers but within that set, they seem to have pretty much all the major Indian e-commerce and online travel companies, which is a fantastic achievement.
I am quite sure that internally, the company sees this as a more meaningful metric for market traction rather than the number of customers (if they don’t, they ought to) but it is difficult to communicate this traction in a succinct, twitter-worthy manner to the media and world at large, it has chosen to tout false proxies to make for sensational headlines. The problem with this is that at some point of time, it is quite easy for you to believe in your own hype and mistake it for reality – you are then set on a doomed path of constantly having to up the ante in terms of touting increasingly inflated false proxies to show that you are ostensibly progressing and gathering momentum.
You cannot “hack” your way to true traction.
Another unfortunate fall-out of this attempt to deify the notion of traction is the emergence of the idea that you can “hack” your way to get to where you want to be. Some of the means adopted are misguided, if not misplaced – for instance, hiring so-called “growth hackers” (often even before the product has been launched) who will magically get you traction.
Others include following supposedly sagacious advice on how to demonstrate that you have traction (which includes gems like “compress the x-axis” and “change the y-axis”). But the most pernicious practice that I have seen is the attempt to “generate heat” by adopting unsustainable and often unethical, if not illegal, ways to rapidly grown your user base to show that you have momentum. These include things like “buying users” either through the media or by inducements and leveraging the social graph of your users to spread without actually taking their permission. As we have seen from the downfall of companies like Viddly, not only are these type of hacks unsustainable, they often have a tendency to boomerang on you in the long run.
‘Data-driven seed-investing’ is an oxymoron.
One argument that is posited in favor of the emphasis on traction is that it indicates an evolution in early-stage investing where the numbers behind the traction let investors adopt a data-driven framework for their investing decisions. Please allow me to call BS on this claim – it is impossible to have data-driven investing stratagems at a seed-stage.
Early stage investing has been and continues to be primarily based on gut and instinct – experienced angel investors (the ones who can actually add value to your company beyond just the capital) will inevitably have developed the ability to identify “winning attributes” patterns and will not need numbers to decide one way or the other. I would go as far as to say that angel investors who insist on traction to decide are lazy – lazy in the sense that they do not make the effort to do a deep dive to understand the team and their idea/vision and require you to prove yourself a priori.
You are probably better off without investors like these because over time, traction will follow a sinusoidal path – there will be crests and troughs rather than a secular “up and to the right” curve and if your investors put more importance on data than on the entrepreneur, there is more than a decent chance that you will not get their support when you are in the troughs.
Now all of this is fine but how does one go about attempting to raise a seed investment if traction is what the investors insist on.http://www.nextbigwhat.com/traction-dumbing-down-of-seed-investing-297/http://www.nextbigwhat.com/wp-content/uploads/2013/02/tyrannyoftraction.jpghttp://www.nextbigwhat.com/wp-content/uploads/2013/02/tyrannyoftraction-110x85.jpgStartup Resources