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The only thing you need is traction.

You're only saying that because you've never tried raising funding for a company with traction. But except for very rare exceptions, even when you have traction there are a whole new set of questions about the nature of the traction.

Sure, not all startups that have traction will get funding.

The point I wanted to make was that there are just so many startups that got funding because of traction, but that have such a low scalability. I always think to myself when I see read these stories: "Dude, this can be worth $50M/a 10x return max. Blinded by traction again."

"If you are a startup that has low scalability, but if you have traction, you will get funding"

To be fair, I think most people tend to underestimate the scalability (as well as the Total Addressable Market) of successful startups at the early stage. As PG puts it, the big winners often look like bad ideas in their earliest stages.

Take Rap Genius, for example. I'll freely admit that, when I first heard about the site and all the funding it received, I had no freaking clue why it was getting so much attention. I thought that this time, finally, unquestionably, the VC community had gone truly bonkers. Later on, when someone explained the potential to me -- that the underlying technology and platform could become X, Y, Z -- I was floored by the possibilities. And I felt like an idiot for not seeing it earlier.

I know a lot of people who had very similar reactions to airbnb, and to this day, a lot of people still have that reaction to Uber ("An app just for calling cabs??? Seems pretty narrow!"). Same thing with Tesla ("It'll never work at scale; you need to whole infrastructure of power stations on the street corners!").

Scalability is very hard for the average observer to gauge. It's even hard for the average tech enthusiast to gauge, and probably hard for the average VC to gauge.

Yes and it's funny that the 99% I mentioned are all followers, who look for pattern matches. YC also goes so strongly after patterns and they have also gone for lots of startups with very low scalability recently. What they don't realise is that when you go for startups that match the pattern, you actively sign up to not pursue the outliers and this not the big hits.

Investors should exclusive pursue the outliers and for that reason MUST look for the startups that don't match any elements of the "pattern". (except for a team that executes)

But they dont get that.

understand that even the best investors have to pay heed to the Pattern because it tells you when things are different. it is very, very hard to evaluate, from scratch, every opportunity that comes your way. (I myself have been pitched a thousand+ times. Augh.)

the Pattern is helpful because it is the differences that make companies succeed or fail; bad investors automatically think that differences from the Pattern are automatically bad.

that said, traction is one fact that makes all other hesitancies and issues disappear. that is why so many investors have their minds changed by it. "I don't love this idea but the graph goes up and to the right, so I'd better talk to them."

Virtually all of the breakthrough conceptual innovators in any field (music and art, to name two) also have comprehensive knowledge of all of the creative work that came before them. It's really rare to get the big breakthrough out of someone who isn't obsessively steeped in the field.

I've heard it said about jazz and poetry that masters and beginners both break the rules. The difference is that masters know the rules so well that they can decide which rules ought to be broken, and when, and why.

"The only thing you need is traction. Anything else doesn't matter. It seems insane, but investors are blinded by traction."

Very true, but why is this insane? Investors see tons of people with great big ideas who talk about passion. Since you have to winnow the field, why not do it on something that matters (traction) versus something that doesn't (the alma mater of the founder, or how they dressed).

It's insane, because if you invest in a startup with decent traction you don't have your 100x big hit anymore, because you invest in a valuation at say $4M.

Instead, if you had spotted the startup's potential pre-traction, maybe just 1 or 2 months before it gained traction, you could have invested half the amount at a $2M val.

And this ability,ladies and gentlemen, to spot a startup 1-2 months pre-traction, makes the difference between a 25x and a 100x.

I think they're making a rational call that they can't weed out which ones will make it. So in your example, they would need to invest in more than twice as many at the lower valuation to get the same # of successes.

Just being the devil's advocate. (Not that I intend to compare VCs to devils!)

As long as a start up with decent traction has 4x more chance of success (ignoring for now the extra time required for due diligence), which seems likely, a rational investor would typically go for the 25x option.

Nice explanation.

It might be worth it for the VC to wait and see, then overpay, because 1 or 2 months could be a significant percentage of a young companies' total life. They are overpaying for the extra data points and insight, in effect.

Thanks and good point and I think that's where new Angels or other investors without any track record or network can get the good deals.

By finding founders whose startups are just about to take off, even better with the founders not knowing it yet. :)

Which leads to a problem pg has pointed out elsewhere... VCs dragging their feet on potential investments, waiting for more data. This steals bandwidth from the founders that could be used to build the company.

Ah, but in order to get that 100x they have to also invest in a larger number of startups, because of all the ones that look promising, they don't know which ones will actually succeed. So their expected return is actually increased -- probably quite substantially -- by requiring traction.

Not insane at all.

Is the traction you're referring to here the type limited to web startups or (if anyone else knows) does this hold true for virtually any startup in any industry? I imagine there are a handful of industries where achieving 'traction' may take several years, eg biomed.

On one hand I'm inclined to come out and say, "No, in some industries you simply cannot get traction before going to investors (repeatedly)", given my experience in the biotech industry. Most biotech companies don't get "traction" until even after IPO, because the capital needs associated with making scientific and medical progress are large.

Yet, the reality is that even in these companies there's a notion of traction, and it's absolutely critical. It's not measured in terms of users, but instead manifest in scientific milestones. Every time you demonstrate the scientific validity of a piece of your tech, you are de-risked in the eyes of investors. That mirrors traction, even if it's less direct.

Another way that biotech companies can achieve notions of traction comparable to tech companies is through intermediate business models, such as operating as a contract research organization or reference laboratory.

Despite those parallels, I'd say that biotech traction is still difficult to achieve because most science lacks determinism in the rate of progress.

Traction is the most important for web startups because technology is not the limiting factor. There are a lot of teams out there that can build whatever. The problem is mostly reduced to market-risk. Traction is a big signal that market risks are mitigated even when that may not entirely be true.

Biomed startups have mostly technology risks, the problems are well-known and there is a very defined (and heavily regulated) goto market process. As the comment above mentions, the thing that gets investors excited in biomed startups is mitigation of the technology risk.