Ask A VC: When are you willing to invest in a company that doesn't have traction?

by Adam Koopersmith
January 29, 2013

Nick: When are you willing to invest in a company that doesn't have traction?

There are a number of ways to define “traction”.  Most folks probably think of traction with respect to how much revenue does the business generate, but “traction” could also mean progress recruiting a team or building a product.  For example, there are very valuable companies that have really great customer traction, but very little revenue traction (e.g. Pinterest or Instagram).  As a result, I’ll answer your questions in two ways – “when are we willing to invest in a company that is pre-product?”, and “when are we willing to invest in a company that has product, but is pre-revenue?”. 

For us, it’s rare that we invest in pre-product companies, but when we do it’s all about the team.  If three random people approached us to raise money in the hopes of developing a new data layer for website management, we would politely pass and track their progress over time.  When Eric Lunt, Mike Sands and Mark Kiven approached us to seed BrightTag, we were excited to get involved given their expertise, and our experience working with them in the past.  If you don’t have a product/service, it helps to have a great team, and investors that trust you (usually due to an existing relationship) in order to get funding. 

With respect to companies that have product in market but are not generating revenue, the management team is still very important, but so is the consumer’s/customer’s interaction with the product.  Does the product fulfill a need?  Is the number of users/customers increasing at an accelerating rate?  Is there a path to move non-paying customers to paying customers?  If the answers to these questions are positive, there is a compelling and aspirational vision, and the market is attractive, we may very well be willing to invest despite a lack of revenue.

 

Each week the team at Pritzker Group Venture Capital answers your questions about startups, raising capital, technology, and entrepreneurship. Submit your own question and see more answers here.

 

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