Nice idea, but prove it!
Back in the early 1990s, when I started my first company, it was possible to present a story of a viable business to an investor and successfully raise money. We still needed a great team, a great story, and a believable business plan, but we were not expected to have already built any product or to have made any sales.
A few years later, the midst of the dot-com bubble, the bar was lowered further. Entrepreneurs were funded with an idea plus a financial plan that showed nothing but losses. (Sounds like a joke, but companies made plans to raise venture capital funding, spend it on Super Bowl ads, and go public, all without a financial plan that ever showed a path to profitability.)
Fast forward to modern times, and all that easy money is gone. Today, investors expect quite a lot more. They expect at least a prototype. They prefer to see a few sales or, for online products, at least a few thousand non-paying users. They expect proof that your business model is viable. And they want a believable financial plan to show how it can be profitable.
All this proof is referred to as “traction .”
Put yourself in the shoes of the investors. Which of these would most pique your interest?:
- Startup P – A great story on PowerPoint, and nothing more
- Startup L – Which has letters of intent from five customers, promising to buy the product for $10,000 each, once it exists
- Startup K – Which ran a successful Kickstarter campaign, pre-selling $100,000 worth of product, to be distributed once it exists
- Startup M – Whose mobile app after three months has 200,000 unique users
- Startup R – Which earned $250,000 in revenues in its first quarter after shipping its product
The most popular of the list may vary, but Startup P will be last on every list. Every other company has some traction.
