Traction
This is my second post on "other things we look for".
I hesitated to use the title Traction because its certainly one of the most overused words in the venture capital vernacular. But it is also the "shorthand" peope use to talk about how much uptake a given project has gotten in the marketplace.
So the purpose of this post is to talk about how much "traction" we want to see in a given project before we will be comfortable investing in it.
We have two rules:
1 - don't invest in consumer facing web services without any consumers using them
2 - there is an exception to every rule
First, I'll explain our first rule and also discuss how it applies to "enterprise facing web services". Then I'll talk about when and how we break that rule.
The wonderful thing about the lightweight web services that are becoming the predominant form of software development these days is that they don't take a lot of time and money to build. That's why we see a new one launched every day (sometimes it seems every hour).
But the corrolary to that fact is that the nuances involved in designing and building these services are ciritical. I love to point to Ari Paparo's post on why delicious got it right and his service Blink.com, which was built years before, got it wrong. It was just three small design decisions that made the difference according to Ari. Regardless of whether you agree or disagree with Ari's analysis, it's pretty clear that little things make all the difference in this new software paradigm that we call lightweight web services and most everyone else calls "web 2.0".
So, we may love the idea but until we see the implementation in a live setting (closed beta isn't live enough for us) we do not feel like we can assess the social adoption issues that are so critical. We don't care if it's called beta or commercial code. As long as it has been in the market and we can use it, see how others are using it, look at internal weblogs, and external services like Comscore and Alexa, we can make a good assessment of the adoption curve.
We are happy to talk to entrepreneurs long before they launch. In fact we spend more time doing that than pretty much anything else these days. We want to be able to watch a team take an idea from concept to execution. We learn so much from being able to do that. But until its launched, with tens of thousands of users (ideally hundreds of thousands) using it, we are unlikely to invest.
Some venture firms look for revenues, even revenues above a certain amount, or in some cases, profits. Many want to understand the business model. We don't need any of that to pull the trigger. But we want to see the most imporant thing - uptake. We think that's the hardest nut to crack.
So what about enterprise facing web services? We think they are not that different than consumer facing web services these days. Most of the important services that have been brought into the enterprise in recent years (salesforce.com, AIM, etc) have been brought in by workers who adopted them as consumers would adopt them and then got the enterprise to buy in over time. So we might have different adoption metrics (hundreds of thousands of users might be too much to expect from an enterprise facing web service in the early days), but we generally look for the same kind of adoption before we'll pull the trigger and write a check.
So that's our general rule, show us the "traction" and we'll be able to make an investment decision. Until then, we are happy to talk, learn, watch, and if you'd like, provide advice and counsel.
So when do we break this rule? Generally only when we know an entrepreneur/team really well. In our current fund, we've done it twice. With Isaak Karaev and the rest of the Multex team in their new company, Instant Information. And Peter Semmelhack (aka the hacker) in Bug Labs. We still need to love the idea, but these are also bets on people. And we've learned that its best to bet on people you know really well.
I hope this helps. And I hope you won't wait to come see us or start a dialog with us in some other way (maybe a comment on this blog?) until you've got traction. But we think its best that everyone understand what it takes to get us to pull the trigger and say yes.
September 30, 2006 10:16 AM, By Fred Wilson
Tags: traction uptake
Comments (10)
hey fred,
a few months back i believe you and a few other VCs discussed the changes in the VC industry resulting from the notion that startup costs were decreasing and VC value contribution was going to have to be more about relationships. do you see your investment strategy, both in criteria for investment and what you are investing (beyond just $$$), changing as startup costs continue to decline? for instance, regarding the company i am working on, actoguitar.com (part of a larger idea, actonetwork.com) i am having a tough time imagining ever finding VC funding advantageous; as far as i'm concerned it's almost a failed business idea if VC funding is needed. perhaps i am entirely wrong, but i think there will be more entrepreneurs who find themselves in a position where they need advisory/introduction/relationships services but not financial investment. i am curious if you have any thoughts on this, and if you see this as a developing trend, how you think VCs or any person/company can position themselves to take advantage of this. IMO it is a potentially huge opportunity, but not one that is easily exploited.
Posted by simit patel , October 2, 2006 06:40 PM
I found the post refreshing in its honesty until I reached the following paragraph:
"Some venture firms look for revenues, even revenues above a certain amount, or in some cases, profits. Many want to understand the business model. We don't need any of that to pull the trigger."
- I'm sure you want to understand the business model too, right?
- In the days of Adsense, ten of thousands of users equals revenue.
Other than profit, your treshold seems pretty similar to what you describe as "some venture firms".
As "for in some cases, profits", I think someone should invent a new category/name for venture firms that invest only in profitable companies. Maybe mutual fund?
Posted by Jeff , October 3, 2006 10:06 AM
Thanks for the good read. We found ourselves over-spending on PR recently to pound our site with eyeballs, and then realized that WellcomeMat.com has enough of an organic growth working for it to just cut it out. Impatience...the force that haunts me.
Anyway, I appreciate the honesty, and wish all the startup junkies out there the best of luck! I hope the tech community can continue to help one another out. BTW...Mr. McManus...I too feel the same about outside funding: seems we are in a rare time where funding rarely decides the fate of one's vision.
Posted by Christian Sterner , October 3, 2006 01:18 PM
Thanks for the good read. We found ourselves over-spending on PR recently to pound our site with eyeballs, and then realized that WellcomeMat.com has enough of an organic growth working for it to just cut it out. Impatience...the force that haunts me.
Anyway, I appreciate the honesty, and wish all the startup junkies out there the best of luck! I hope the tech community can continue to help one another out. BTW...Mr. McManus...I too feel the same about outside funding: seems we are in a rare time where funding rarely decides the fate of one's vision.
Posted by Christian Sterner , October 3, 2006 01:18 PM
Hi Fred,
I had a brief meeting with you during the last week of May this year about our Second Brain project.
Anyways, just wanted to give you a quick update:
We have aquired the domain secondbrain.com
We have a blog up and running
We are currently fixing bugs in the first ALPHA version
I'll send you an update with more information later when we are ready to give people an early preview.
Things are going well, and we are staffing up for the BETA version, due in November.
Posted by Lars G. Teigen , October 6, 2006 09:26 AM
Thanks for this post, Fred. It ties in to my feelings about our search site Bessed. We are interested in investors and getting the site to critical mass, but I have no interest in going there until we can prove to ourselves on a smaller level that visitors find the site usable, and that it can be run at a profit. Then, if we can do it small, I think we can get others to help us do it big.
Your post affirms my thoughts on this.
Have been enjoying your personal blog & your many musical suggestions as well, especially your post about music becoming a family affair.
Posted by Adam Jusko , October 6, 2006 03:10 PM
Thanks for this post, Fred. It ties in to my feelings about our search site Bessed. We are interested in investors and getting the site to critical mass, but I have no interest in going there until we can prove to ourselves on a smaller level that visitors find the site usable, and that it can be run at a profit. Then, if we can do it small, I think we can get others to help us do it big.
Your post affirms my thoughts on this.
Have been enjoying your personal blog & your many musical suggestions as well, especially your post about music becoming a family affair.
Posted by Adam Jusko , October 6, 2006 03:10 PM
You write, "We are happy to talk to entrepreneurs long before they launch. In fact we spend more time doing that than pretty much anything else these days."
As an aspiring entrepreneur currently developing a business idea and website, I'd love access to your (or any VC's) ideas and network of contacts, and I may want access to financing that you could provide later on.
But how can I be sure that, with your networks and funds, you wouldn't steal my idea and launch a competing site faster than I can get mine up?
There are many hypothetical reasons you wouldn't just choose to invest in my company - you might disagree with the business model we've chosen, we might not come to an agreement on the terms of a deal, etc.
I believe my idea would not so easily and quickly be copied, and I would like to be able to trust you, but blind faith is generally not the optimal MO in the world of business, in my experience. (I hope I don't sound too paranoid.)
Posted by Stern , October 6, 2006 03:42 PM
Does this mean that the subscription model on the web is a definite no-winner? I believe that for certain premium content that is expensive to produce (e.g. video) where people having already been paying for this content traditionally then charging them on the web is a viable model. Especially for content that would not work if it was ad-supported (e.g. meditation videos). Do you guys even consider a subscription model as viable and if so what sort of subscriber numbers would you consider enough to demonstrate traction?
Posted by Kareem Kouddous , November 10, 2006 07:38 PM
Hey Fred, what you said about the blurred distinction between enterprise and consumer services really rings true -- it's a concept I've been obsessing over for a while now.
Since you asked :) and because I've been looking for a polite way to get this in front of you, I wanted to invite you to have a look at Approver.com -- we launched on Sept. 5 and since then we've gotten modest but (we think) healthy organic growth.
Posted by Jeffrey McManus , October 2, 2006 05:30 PM