Traction attracts investors, but not every good product has the kind they want
Usage is the most persuasive thing a founder can show an investor. Investors are looking for a particular kind of usage, though, and plenty of good businesses do not have it.
I’d build stuff that’s awesome and get people using it. Investors will come out of the woodwork when you do.
David Cohen co-founded TechStars in Boulder in 2006, a program that gives small teams a little money and three months of intensive mentoring. His advice here is aimed at founders who spend their early months chasing investors. The line is credited to him in startup collections; the conversation it came from has not been traced, but it fits the advice collected in Do More Faster, the book he and Brad Feld published late last year.
The argument is about leverage. A founder with an idea and a slide deck has to persuade investors to imagine success. A founder with a product that people use shows them the beginning of it. The second conversation is shorter, and the founder has more say over terms, because investors compete for a share of something visibly working.
Recent months have shown how strongly this works. Instagram launched its photo app last October, gathered millions of users within a few months and raised a round led by Benchmark Capital in February. The company did not have to seek investors out. Its usage figures did the persuading.
The line leaves out two things. First, investors respond to a particular kind of traction: fast growth in a market large enough to return a venture fund. A product can be awesome and loved by a few thousand people who pay for it, and still attract no venture interest, because the market will never be big enough. That is not a failure of the product. It may be a very good small business, better funded by its customers than by investors who need a much larger outcome.
Second, “get people using it” costs money for some products. Software can be built by a few people with laptops. Hardware, medical devices and anything regulated needs capital before anyone can use it at all, so the order the line describes is not available.
There is also timing. In late 2008 and 2009, even companies with real usage struggled to raise money, because investors were protecting what they already held. The woodwork is fuller in some years than in others.
The practical reading is to build usage first where possible, because it improves every conversation that follows, and to be honest about which kind of company the usage points to. If it points to a small, profitable business, that is a result, not a failure to attract investors.