Venture Capitalists That Wait For “Traction” Are Talking Rubbish. Here’s How To Spot Them (And Steer Clear Of Them)
Identify the venture capitalists that know how to do their job, see you for what you are capable of, and back you for both of those reasons.
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I was once a member of an investment committee. Back in those days, the asset class I was responsible for was commercial real estate.
The investment principles of commercial real estate and venture capital are very similar. And in both industries, there are those that are technically competent- and then there are those that have landed arse-backwards into their roles, without having the first clue how to perform it.
As a commercial real estate investor, I’d be pitched by developers day in, day out. All looking to build the very office buildings, residences, or coffee shops that you’re likely to be sitting in right now as you read this.
Professional commercial real estate development is a medium- to long-term investment. Like venture capital, the asset that it creates needs time to bring to maturity, and deliver its alpha returns. After all, a building needs to be built and leased to achieve its maximum capital value.
In the world of venture capital, the asset isn’t the building that’s being developed, it’s the startup and its founder. And its “traction” is the equivalent of the leasing of that building.
Related: Go Big Or Go Home: More Middle Eastern Boldness Is Needed To Break “The Scale-Up Ceiling”
Think of your neighbourhood retail centre. When it’s built, the more shops that are leased and occupied, the more rent it’s earning, i.e. the more traction it’s got, the greater its capital value.
The same basic principles apply to venture capital. The startup (i.e. the asset) needs to be built and gain customer traction in order to achieve its maximum value.
To build a building, its developer either uses their own money, or seeks funding from third party sources, typically a bank. That funding is provided to the developer, before they have constructed anything. Let alone leased any space.
It is provided to the developer in order for them to build the building- way before traction is evidenced.
Venture capital is no different. It is the resource that is required in order to build the startup and obtain traction- not despite it.
As such, for a venture capitalist to say, “We’d like to wait and see traction before investing with you” is akin to a bank telling a real estate developer, “Build your building, lease it, show us the revenue, and then we’ll give you funding with which to build it.’
That’s not how the game works.
As a founder, if a venture capital fund manager tells you they want to see traction before investing, they either don’t know the basic principles of venture capital management, or are fobbing you off with an excuse because they don’t see your vision.
In either case, don’t waste time educating them. Move on. Identify the venture capitalists that know how to do their job, see you for what you are capable of, and back you for both of those reasons.
Related: The How-To: Choosing The Right Venture Capitalist For Your Startup
I was once a member of an investment committee. Back in those days, the asset class I was responsible for was commercial real estate.
The investment principles of commercial real estate and venture capital are very similar. And in both industries, there are those that are technically competent- and then there are those that have landed arse-backwards into their roles, without having the first clue how to perform it.
As a commercial real estate investor, I’d be pitched by developers day in, day out. All looking to build the very office buildings, residences, or coffee shops that you’re likely to be sitting in right now as you read this.
