Gabriel Weinberg's Blog

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I get asked a lot by founders which investors might invest in their startups (as I'm sure most investors do).

There are two sides to the answer. The first side is what investors are right for you? I'm not going to cover that side in detail here because it is a big topic and I want to cover the other side, but know that side is just as important. You want people that can help you but also that you really want to work with for many years.

The second side -- which investors will actually invest in you -- depends on your traction. I made the above graphic to illustrate this point.

Traction is of course in the eye of the beholder (and that's one problem with using the word itself). Generally speaking though, the more sustainable growth of engaged users/customers you have, and eventually the more sustainable growth of revenue/earnings you have, the more investors will be willing to invest in you.

The smaller your perceived traction the more you have to focus on investors that would invest in your idea and team. OK, so who is that?

When you're just starting out and have just an idea on a napkin, you're really asking people to invest in your team. There is so much risk in the execution of your idea (which may likely change dramatically) that investors are more making a bet on you personally.

There are currently two groups of investors that regularly invest only in teams:

1) Friends and family; in other words, people that really know you. I'm surprised how little I see founders take friends and family money (including their own money). It actually sends a very positive signal to the next series of investors even if it is a smallish sum of money, say 20K. You had enough conviction to put in your own money and put your reputation on the line with your family.

2) Accelerators. There is one or more in almost every major city now. This relatively new funding source dramatically opened up early money to teams, but you generally can't get too far on it alone.

A third category is also emerging in crowd funding.

After you get your team moving and have started actually building something (but don't have any real traction yet), you open up the investor universe just a little bit further to include investors who really buy into your idea. Who is that? Those are people who generally have deep expertise into what you're trying to disrupt. Look for investors that invested in the same general technology area (e.g. search) or previously sold a company similar to yours.

It is very hard to to convince investors when you have no traction. Your story itself is either going to click or it isn't, and it is much much more likely to click if the investor deeply knows the background to what you're doing already. Think about it. If the investor doesn't have the knowledge to see the obvious disruption that you see then they'll have to educate themselves on all that background knowledge to get to the same point you are.

Once you have some traction, the universe opens up further. But check out the chart -- even with a lot of traction the universe of investors that will actually invest in you is still small.

Investors have investing theses -- these can include a whole host of factors like geography, market size, technology area, valuation, amount invested, ownership requirements, control requirements, etc. When you match your company to these investing theses, most investors get excluded even for companies that have a decent amount of traction.

Luckily the investing theses are pretty well-known. A quick proxy is to look at companies an investor has already invested in; that is, their portfolio. If these seem to match you then you're probably in the right area.

Another way to look at this whole question is risk. When you start out you have a lot of risks in different areas, e.g. team, technical, market, financing, etc.

As you de-risk these areas with actual traction, more investors will want to invest in you simply because the deal is less risky. You also get valuation bumps as a result.

Your friends and family don't need traction to de-risk the team because they already know you. Knowledgeable investors (in your specific area) need less traction to de-risk technical and market risk because they already know your area.

As a corollary, if you're out raising money and people think you're crazy, you don't have enough traction yet to be talking to those people.

The main takeaway is to make sure you are focusing your efforts on raising money from the investors that might actually invest in you.

Not using any structured approach for getting traction is one of the most common traction mistakes, and yet there are simply not many traction frameworks out there to help you make sense of the process. In our upcoming Traction Book, Justin and I present the Bullseye Framework for getting traction. It is a simple approach that is meant to act on the following premises:

1. In any given growth phase, usually one customer acquisition channel (traction vertical) is largely responsible for really moving the needle for a startup. This is a consequence of the fact that getting traction itself is usually (though not always) a power law problem.
   
   
2. There are about 20 different traction verticals that we see startups use to get traction. It is hard to predict beforehand exactly which traction vertical will work best for your startup at a given time. You can make educated guesses (and you should!), but it is hard to tell until you start running tests whether a given vertical is the best one for you right now.
   
   
3. Most startup founders have a significant bias towards (or against) using certain traction verticals, e.g. for ones they're already familiar with and against ones they know little about, find icky or involve a lot of perceived shlep. A corollary of this premise is that there are far too many startups focusing on the same traction verticals and that many potentially promising verticals get overlooked and are therefore under-utilized.
   
   

Our framework for approaching traction uses a bullseye metaphor (see picture). At any given time, the inner circle contains your most promising traction verticals; the next concentric circle contains the next most promising, and the latter rung contains the rest.

Network effects occur in a service when the value of that service to its users grows with each new participant. Generally strong (non-linear) network effects lead to winner-take-all market conditions where it is almost impossible to compete head-on after the market leader has significant scale.

Craigslist is a great example, and Chris Dixon has a great post outlining how competition is occurring against them (since head-on has been fruitless). Within social networking, you of course have LinkedIn and Facebook with the business and personal monopolies. 

On the face of it (pun intended) these seem unassailable in the same way as Craigslist. Yet even though Facebook has about five times more users than LinkedIn (~1B to ~200M), I think that Facebook's network effects are more fragile than LinkedIn's.