Sumanth Raghavendra, serial/parallel entrepreneur (currently founder of Q-Prize winner Deck App Technologies and Live Inbox and previously founder of Sabeer Bhatia- and SoftBank-funded InstaColl), has a great post on what should really count for "traction" - especially when it comes to seed financing.
If it boggles your mind as to how a company with just three employees (the other two are founders) and which spends nothing on marketing can be unprofitable despite several thousand customers, join the club! The answer lies in the subtle sleight-of-hand: the plans offered by the company include a plan that is completely free, so the vast majority of “customers” are those who don’t pay a dime. They are therefore customers only in the loosest sense of the word.Venture Intelligence is the leading provider of data and analysis on private equity, venture capital and M&A transactions in India as well as Financials & Valuations of Private Companies in the country. Click Here to view our products list including the Free Deal Digest Weekly: India's First & Most Exhaustive Transactions Newsletter.
Everyone from angel investors to seed funds to accelerators are shouting from the rooftops that “traction trumps everything” or variants thereof – “lead with traction”, “traction is the only intellectual property you have”, so on an so forth. While there is no definitive definition of traction, what is essentially implies is that there is some market demand for your solution and this is ideally measurable and demonstrable.
...the use of “number of customers”...is a false proxy – now the company probably has a few hundred rather than six thousand paying customers but within that set, they seem to have pretty much all the major Indian e-commerce and online travel companies, which is a fantastic achievement. I am quite sure that internally, the company sees this as a more meaningful metric for market traction rather than the number of customers (if they don’t, they ought to) but it is difficult to communicate this traction in a succinct, twitter-worthy manner to the media and world at large, it has chosen to tout false proxies to make for sensational headlines. The problem with this is that at some point of time, it is quite easy for you to believe in your own hype and mistake it for reality – you are then set on a doomed path of constantly having to up the ante in terms of touting increasingly inflated false proxies to show that you are ostensibly progressing and gathering momentum.
...I would go as far as to say that angel investors who insist on traction to decide are lazy – lazy in the sense that they do not make the effort to do a deep dive to understand the team and their idea/vision and require you to prove yourself a priori. You are probably better off without investors like these because over time, traction will follow a sinusoidal path – there will be crests and troughs rather than a secular “up and to the right” curve and if your investors put more importance on data than on the entrepreneur, there is more than a decent chance that you will not get their support when you are in the troughs.