The Traction Cycle: Why Sectors Become Hot In Venture Investing And Who You Should Raise From

virtuous cycleI’ve said many times that traction is how venture investors get comfortable with sectors they don’t have experience in. When you’re raising early stage capital from angels or seed funds, it is easier to raise from people who understand your business; that usually means people with experience in the space.

If an angel or VC doesn’t have experience in a sector it is difficult for them to know if an idea is good so they fall back on traction. This is why every demo day pitch has a slide with a graph going up and to the right; they are trying to demonstrate traction of some kind.

This also explains why sectors become hot in VC. Once one company starts to do well, the number of VCs who have dug in and now have some level of experience with the sector increases. Take Uber for example, after more than five rounds of funding there are plenty of VCs who have experience with the on-demand space. That makes investing in companies that are “Uber for X” easier for those investors.

If you are in an established category, finding venture investors that are familiar with your space will be relatively easier than if you’re attacking a area that most people don’t have experience in. If you don’t happen to be in a well-understood sector, look for investors that have some background in your space since they will require less traction and proof points to get comfortable with your business.

Leave a Reply

Your email address will not be published. Required fields are marked *