Evaluating traction in early-stage startups
You may have noticed that Hustle Fund hosts a lot of events for the startup community. At our founder events, we get one question over and over again.
"What kind of traction do investors want to see?"
Now, there are plenty of resources out there that outline the generic numbers investors look for at each stage. Heck, we've written about this, ourselves.
But when it comes to a startup's traction at the earliest stages, Hustle Fund doesn't pay too much attention to the numbers.
Today I wanna talk about why that is, and what we look for instead. If you're getting into early-stage investing and are curious about how to think about traction, this one's for you.
Why we don't focus on the numbers
Here's the thing. Hustle Fund is a pre-seed venture fund.
This means we see a lot of companies that are pre-revenue, pre-customer, and pre-product/market fit.
It's not that we don't want to see revenue, customers, and PMF. It's just that by the time startups have these things, they're often raising at a stage and valuation that is beyond our model.
Now, this isn't always the case. For example, we invested in a company a few years ago that had amazing revenue and loads of customers. And they were raising at a pre-seed valuation. The catch? They were based in Venezuela. Being based outside the U.S. made it harder for them to raise from institutional investors.
But I digress.
The point is that at the earliest stages it's rare to find startups with big, impressive metrics.
You may remember that our team uses a 5-pillar evaluation system to decide whether or not to invest in a startup.
Those pillars are:
An example of how we use this system is here, if you're curious.
The question is.. if traction isn't that important to Hustle Fund, why is it in our evaluation process?
The answer: because we want to see that founders are doing something to move the business forward.
It's ok if they don't have any customers. But too often we meet founders who have an idea for a startup... and not much else. They've talked to their friends about the product they wanna build. Maybe they spun up a landing page. They might even have gotten a few folks on their email distribution list.
But those are not indicators that this founder is committed to solving a massive problem. Or that they're serious about building a solution to solve this problem.
So, what are we actually looking for when we look at traction?
At a high level, we're looking for indicators that the founder is doing something to push the business forward. Some examples of what this might look like:
1. customer discovery
What we're looking for here is proof that the founder is interviewing the people they think are their target audience. And not just a few of their friends. Ideally dozens or even hundreds of people.
These calls (yes phone calls, not emails) should give the founder a unique perspective on what the user's problem is, how the user is solving the problem now, and what the pain points are within the current solutions.
They should also have a deep understanding of the profiles of their target customer – their age, their jobs, where they spend time online and offline, etc.
2. pre-sales or waitlist
The goal here is to understand if the founder is building an audience of potential customers.
For B2C companies... do they have an email distribution list and/or waitlist of people they can start selling to once the product is ready?
For B2B companies... have they lined up organizations who are willing to beta test the product once it goes live? Or (better yet) does the founder have any customers committed to paying once the tech is built?
What we'd like to see here is that the founder is moving fast and trying things... even if those things aren't perfect.
- are they exploring partnerships with 3rd party vendors as a way to approach customer acquisition?
- are they measuring social media engagement across different channels?
- are they A/B testing messaging on their landing pages?
- are they playing around with different ways to increase user engagement?
Traction ≠ Revenue
At the pre-seed and seed-stage level, it's totally appropriate to ask about the company's revenue, users, email list, etc. But really anything above 0 at this stage is pretty exciting.
So in addition to those questions, we highly recommend that you also dig deep into the founder's insights about their users and their plans for customer acquisition... and WHY.
That'll tell you a lot more about what kind of founder you're working with than a number on a page.