Traction is how investors who don’t know a space get comfortable enough to invest.
In Early Stage VC there is a ton of risk and if you’re not an expert in a space then traction is the best way to know if an idea is any good. The market has spoken.
If a VC or Angel is an expert in a sector then they can get comfortable without that traction.
Last night I was discussing this with another investor who pointed out that even when you’re an expert you may not be able to pick winners in a crowded market, so in that case traction is important even for an investor who knows the space. An example of this is when there were dozens of photo applications; it wasn’t until Instagram started to pull away from the pack that investors knew who to put serious money behind.
Ultimately this means that having traction will get you a higher valuation since it brings more investors to the table, which creates competition, and that drives up your valuation.