Which Is More Important in Fundraising: A Strong Story or Strong Traction?
Advice

Which Is More Important in Fundraising: A Strong Story or Strong Traction?

By
Hsu Ken Ooi
August 11, 2022

Fundraising is one of the most difficult things a founder has to do. And I suspect, given the current market conditions, it’s even more difficult now than in the previous seven to 10 years.

A common question we get is: “Which is more important: strong traction or a strong story?” But what is strong traction and a strong story — and why are they important?

Traction

A startup typically has strong traction if:

  • It is growing 5% to 7% weekly
  • 40% of users are still using the product after six months

I say typically because this is greatly dependent on the company’s stage and industry.

Growth should be much faster for startups in the very early stages but slower for those in the series A phase and beyond. Similarly, consumer social products tend to have lower retention than B2B services.

Story

Meanwhile, a startup has a strong story if it has a compelling thesis about how the world should be and how it plans to get there. Typically, they start with a familiar observation, followed by something surprising (a secret), and end with a strategy that takes you from the familiar to the surprising.

Let’s use Airbnb as an example. The company observed two things:

  1. During peak times, hotels are packed and become very expensive.
  2. People want a more authentic, unique experience when traveling.

Its secret:

  1. People have plenty of room in their homes.
  2. They’re willing to rent it out on a short-term basis.

Its strategy:

  1. Focus on large cities especially when there are events.
  2. Target young people who are most cost-conscious and more willing to stay in other people’s homes.
  3. Siphon traffic from Craigslist by posting its own listings.

Secrets are interesting and worth more discussion. By definition, these are things only a few people know or believe. Usually, these remain secrets because other people don’t know them, they are counterintuitive, or they are against conventional wisdom.

Airbnb’s secret was counterintuitive. Uber’s secret – that people would get in cars with strangers – is against conventional wisdom. Parents often tell their children not to get into cars with strangers.

Cases

Now that we know more about these two dimensions, let’s enumerate the different ways startups can manifest them.

Strong Traction + Strong Story

If you’ve got solid numbers and a compelling story, you’ll likely raise funds easily and at a high valuation (message me so I can invest).

An example of an early-stage company with both strong traction and a strong story is PayPal. Founded in 1998 and launched in 1999, the payments giant famously grew 10% daily (traction) through a referral scheme that was a huge success, even though it almost bankrupted the company.

PayPal was also one of the first internet payment products at the height of the internet bubble (story).

Weak Traction + Weak Story

If your startup is in this territory, fundraising will be almost impossible.

It’s hard to come up with examples because most of these companies don’t make it. However, I’d argue that Airbnb was like this in the early days.

In the beginning, the platform was only available for high-profile events. The first time it opened bookings, it had two guests stay for a design conference in San Francisco. The second time, nobody stayed. The third time was for the SXSW conference, and the only guests who booked were the founders.

That’s definitely not strong traction. At the time, the company was also still called Air Bed and Breakfast, and investors couldn’t get past the idea that people would want to sleep on air mattresses in other people’s homes.

Airbnb obviously gained traction and improved its story, but in those early days, it wasn’t an obviously promising startup.

Strong Traction + Weak Story

Now if you’ve got the numbers but have a weak story, you might be able to fundraise. The thing is, you might raise at a low valuation.

A weak story means investors won’t think your company can be that big, so if they invest (most won’t) it will be at a low valuation.

Direct-to-consumer companies often fall into this category. The good ones are able to build a real business with reasonable traction, but investors will always ask whether they’re scalable and if the market is big enough.

Weak Traction + Strong Story

If your company falls into this category, then it depends what stage you’re in. If the startup is at pre-seed or seed, you’ll probably be able to fundraise. If you’re at series A or above, you probably won’t.

Investors give you money in the early rounds to test your thesis. In the later stages, they need to see that your model works. Web3 companies often fall into this category. Many haven’t launched yet (no traction) or have very few users (weak traction), but if their thesis is correct, then they have the potential to be significant.

Observations

Looking at the outcomes, it is surprisingly more advantageous, especially early on, to have a strong story than strong traction – particularly in Silicon Valley and if you operate in frothy markets. The builder in me hates this, but in my experience, this does seem to be true.

Investors invest in the future, not the present. Traction is about the present and, at best, is evidence that your story is likely true. But if that story isn’t exciting or valuable, then it doesn’t really matter. After all, not all evidence is equally valuable.

With that being said, stories are fluid. It’s easier to turn a weak story into a strong one than to turn weak figures around. Often, companies with strong traction and a weak story either 1.) don’t understand why people are using their product or 2.) aren’t being imaginative enough. Having traction is incredibly important, but it’s not sufficient.

To be clear, I’m looking at this from the perspective of fundraising. Being able to fundraise successfully doesn’t mean your startup will be successful. As a founder, your job is to solve problems for your users. Fundraising is a way to get more resources so you can solve these problems better or for more people.

Founders often feel like their pitch is a work of fiction, and it makes them uncomfortable. I like to remind them that their job, as founders, is to turn that fiction into reality.

This article was first published in Tech In Asia, which was based on Hsu Ken's LinkedIn thread of the same topic.

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