You can only go with traffic

By October 3, 2006Venture Capital

Crowd of people

This is a follow up to an earlier post You’ve gotta go with traffic where I argued that if you’re site has (lots of) traffic it will be valuable.

This post comes at things from the other side.  Please forgive the generalisation, but until you have traffic on your site you won’t have much value, and are probably too early for VC investment.  Here is why:

  • It doesn’t take much money these days to get a service up and running and generate traffic
  • Because it is so cheap to launch services there are literally hundreds of them – see here for a list of 200 social bookmarking sites, and in this post Jeff Clavier says he has counted nearly 300 video hosting, sharing and editing sites
  • Good execution rather than good ideas is the scarce resource here – good ideas often fail for small reasons that are difficult to see in advance – see this candid description of why an early social bookmarking site failed from an entrepreneur who raised $13m

When you put all that together you end up thinking that it is really hard to predict which companies will be successful until they have started succeeding and that the best companies should be able to generate traffic before they need venture capital (and the best founders will choose this route to avoid dilution).

This is a new development in small company financing and has come about because it has become easier and cheaper to launch services.  It applies to consumer or enterprise facing web services – other sectors carry on as before (e.g. semiconductors where we have been active recently).

A lot of the inspiration for this post came from Fred Wilson’s comments on traction and usage.  As he says there are exceptions to every rule and you might invest earlier than normal in a team you have backed before (as we did earlier this year with Mike Hedger & co. at EnvironmentIQ).  Also we find it much easier to invest in companies we have known for a while so from our side at least it is best to start talking early.

In truth there isn’t much more here than you in Fred’s thoughts.  I wrote this post though to call an end to the journey I have been on in my own thinking.  Regular readers will have observed my views on consumer facing web services change to see value earlier and earlier in the life cycle of companies.  I had been wondering in my own mind how much further it would go – but this is it – in my opinion for a VC investment you can only go with traffic.