Back when I was raising a Series A during the last bubble I made one of a thousand presentations to a VC firm. The partner had foisted the meeting off on an associate. (It’s always nice to have your future in the hands of a fresh graduate.) We had build a successful product with 350 enterprise customers, a consulting business doing about $1M/year, and had just rolled out what was to be our flagship product. We had a few initial customers and our price point was $250K. We were seeking a $5M investment.
At the end of the pitch the associate indicated that we were too early for their profile, but after we had some traction they’d like to talk with us. I asked him how many customers they would consider traction. His answer was “We like to see about 100 customers for enterprise tools to prove traction.”
There it was, the T word: Traction. It’s an excuse that VCs use when the bubble is deflating. When the bubble is going strong you can get a first round with a great idea on a napkin. But when they’re pulling back, it’s like borrowing money from a bank. You need to prove that you don’t need the VC money in order to get it.
I then asked “So, what you’re saying is that if a company with breakthrough technology came to you and had $25M in revenue you’d be willing to invest $5M? in a preferred position?” He just stared back blankly. Clearly the 100 number was just a knee jerk reaction — he hadn’t thought about our numbers. In case you’re wondering, that’s a valuation of 1x revenue.
The problem is that when money starts getting hard to get it’s because the risk profile of investors has gotten out of touch. I talked about the flip side of this in Is Your Risk Meter Broken? But it is easy for VCs to break their risk meters as well. During the height of the bubble it’s irrational exhuberance. During the pullback their excuse for just about everything is “not enough proof.”
The T word means No. They don’t believe in your business. They don’t believe in you. If they did, they’d be willing to take a risk, because that’s the business they’re in. If they believed as much as you do, they’d be willing to fund without the proof points because they’d want to be ahead of the other investors that will take a pass. Everyone is looking for the diamond in the rough that no one else recognizes.
Don’t kid yourself that there is any amount of traction you can get that will change the story with this investor. If you could get enough traction to change their mind you wouldn’t need venture investment. Just keep kissing the frogs until you find your prince.
The request for $25M worth of traction from the recent business school grad was a low point on the roller coaster ride. The next turn up is that a week later I was in a pitch with a VC who became our Series A. He made his decision at the end of the pitch. He knew the market, had done the research, and realized the opportunity. That’s what you’re looking for, not the gutless ones that want to remove all risk before they make a venture investment.