I have written a few posts on how getting users for a consumer internet service is the only real sign of success. The way the world is at the moment having a good idea is only 10% of the battle, the other 90% is about good execution of your site and getting distribution. From the perspective of a VC who needs to invest millions of dollars, traction is usually the only evidence we can look at to determine if this 90% has been done well. That is why many early start-ups leave VC meetings with the phrase “come back when you have a hundred thousand users” ringing in their ears.
There is a good post on the Union Squares website which talks more about traction as an investment criteria.
The inspiration for this post came from a comment an angel investor left on a previous post. (S)he made the point that predicting traffic growth in advance is a difficult business, but as an angel investor if you wait until after it has happened you will miss the deal.
This got me thinking that whilst it is fairly easy for VCs to take a ‘wait until there is traffic’ approach to investing in this space, life is much tougher for angels. As I have thought about it some more, though, I have come to the conclusion that we look for the same things, but with a slightly different emphasis. This should be no surprise really, and is the same as it is for investing in traditional software and other sectors.
I have tried to capture the key differences in the following table.
|Elegance of solution/website
||Critical to take a view on this (33%)
||Will take a thorough look at the site, but starting with belief that if lots of people are using it, it must be good (15%)
|Distribution – how will the service spread faster than word of mouth
||Need to see evidence of detailed thought/plans and initial progress (33%)
||Will want to understand plans for distribution, but will look at historical growth as primary evidence (15%)
||Tens of thousands of users (33%)
||Hundreds of thousands (70%)
I only put the percentages in to make my point clearer, there is no science behind the numbers and they are only meant to give a broad illustration of the different weightings in an overall investment decision. Note that I have said traffic is also important for angel investors. As I’ve talked this question over with a few of them that is the message I have heard (or heard from most of them – it is inevitable that I generalise when blogging, but I feel I am doing so more than usual with this post).
It is worth dwelling a little bit longer on distribution. This is the element that is most easily forgotten. Everyone loves to talk about the their service and the beauty of their website, but distribution is more difficult and is often the missing piece. As I have written before, this is what is leading people like Reid Hoffman to argue that distribution is to web2.0 as location is to traditional retail.
Clearly there are lots of other factors that also get considered (quality of management team, exit potential, market landscape etc.) but these will be the same for angel and VC alike. The three items in the table are where the main differences in stage of investment shows itself.