Angel funding and traction

Angel investor

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.

  Angel
VC
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%)
Traction/traffic
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. 

 

 

  • Please read that post from Paul Fisher…. waiting for the 100k does not mean I will not keep figthing for doing it earlier:
    http://paulfisher.typepad.com/growth_technology_venture/2006/12/reevoo_is_a_tru.html
    It echoes one of my tagline: “what’s the point of having the right price if you don’t have the right product.”

    Distribution ! Distribution ! Distribution !
    Working on it: Would you accept to have the widget ? 😉

    I’m happy we’ve meet….2007 is gonna be fun.

  • Please read that post from Paul Fisher…. waiting for the 100k does not mean I will not keep figthing for doing it earlier:
    http://paulfisher.typepad.com/growth_technology_venture/2006/12/reevoo_is_a_tru.html
    It echoes one of my tagline: “what’s the point of having the right price if you don’t have the right product.”

    Distribution ! Distribution ! Distribution !
    Working on it: Would you accept to have the widget ? 😉

    I’m happy we’ve meet….2007 is gonna be fun.

  • Jim

    Intersting article there are some great start up projects to be accessed by angel’s available at http://www.angelinvestmentnetwork.co.uk all having that same problem of being rejected by VC’s due to this problem, worth checking out.

  • Jim

    Intersting article there are some great start up projects to be accessed by angel’s available at http://www.angelinvestmentnetwork.co.uk all having that same problem of being rejected by VC’s due to this problem, worth checking out.

  • I can tell you that as an Angel I have passed on several deals where traffic IS the company, and the traction just wasn’t there yet. Throwing cash at a site with 5,000 users takes a stronger stomach than mine I guess. I may not be lucky enough or smart enough to pick the youtubes and myspaces of the world when they are brand new and competing against 100 other similar sites. Feels like roulette!

  • I can tell you that as an Angel I have passed on several deals where traffic IS the company, and the traction just wasn’t there yet. Throwing cash at a site with 5,000 users takes a stronger stomach than mine I guess. I may not be lucky enough or smart enough to pick the youtubes and myspaces of the world when they are brand new and competing against 100 other similar sites. Feels like roulette!