[Fundraising for Startups] Lesson 3: Traction is the new IP

A few years ago, I was having a drink in downtown Palo Alto with a friend. (OK, maybe I was pounding beers like crazy... whatever, don't judge me.)

A couple of the guys on the other end of the bar were talking about this new startup that let you hail a cab from your phone. And let you pay for it on your phone. And all of this was in a shiny black car. And they were raising money.

But Paul, you might say, that sounds like a great idea -- you should invest!

Nope, I passed. I thought it was a terrible idea. And I don't invest in terrible ideas.

It was Uber. And, as it turns out, I was wrong.

And, in hindsight, every time I've judged an entrepreneur's idea -- I've been wrong. Every. Single. Time.

If you want to raise money, you need to have small but measurable usage. That's called traction.

And traction is the only thing that all investors understand.

You don’t need hundreds or thousands of customers (though, that won’t hurt), but showing me that someone is actively using the product often and/or paying for it shows me that you’re building something that people want.

Traction gives you credibility. Credibility gets you meetings. Meetings are where the magic happens.

Once you get the meetings though, don't screw it up.

I'll spare you the pain. There's one thing you should never EVER say:

"We did all this through word of mouth."

OR

"WE HAVEN'T SPENT A SINGLE CENT ON MARKETING!"

Ugh.

When you say that, the investor is thinking, "Shit. We're going to bleed money on this next round, aren't we?"

If you want to raise money, you have to always be proving that your goal is to build a business. A BUSINESS.

In today's age, that's easier than ever: exploit the shit out of online distribution channels.

You’ve got access to 700M+ people via Facebook ads. You’ve got even more access to people via Adwords. And don’t forget about LinkedIn ads, Quora, Pinterest, Twitter, Android, iOS and other networks. Show me that you’re testing distribution models on those channels.

That doesn't take a lot of money (most ad platforms will let you test with as little as $25) but it does take some effort. SHOW ME THE EFFORT.

Just prove to me (and to any investor you meet) that you're trying to build a business. Stop talking about your idea. Stop talking about your product. Stop talking about changing the world.

Just talk about your business. And, in order to have a business, you need to stay focused on the traction.

I'll let you take that all in for now. I'll talk to you tomorrow.