editione1.0.1Updated September 19, 2022
You’re reading an excerpt of Angel Investing: Start to Finish, a book by Joe Wallin and Pete Baltaxe. It is the most comprehensive practical and legal guide available, written to help investors and entrepreneurs avoid making expensive mistakes. Purchase the book to support the authors and the ad-free Holloway reading experience. You get instant digital access, commentary and future updates, and a high-quality PDF download.
Sales to paying customers is the greatest validation of an idea, and the product that delivers on the idea. Traction is a term that most often refers to a startup’s progress in getting customers.
A company’s traction with customers indicates that there is actually demand for the product or service. This is sometimes referred to as (or as an important part of) product/market fit,* meaning that there is a validated market for the product at the stated price. Traction also shows that the company has actually built a working version of their product, and that they can sell it to businesses or generate consumer demand, for B2B or B2C offerings respectively.
In many cases you, the angel investor, will not be the intended customer for the startup’s product, and without interviewing lots of potential customers it can be challenging to assess the appeal of the product. Traction tells you unequivocally whether the intended customer is willing to use and pay for the product. You do not need to be an expert in the domain or up to date on the competition, because the customers are making rational decisions with all that information.
caution Keep in mind that traction with a free product is not necessarily indicative of customers’ willingness to pay.
important As we have said elsewhere in this book, the stages companies are at when seeking angel investment vary radically, and every angel has a different level of comfort around risk. Some companies you might choose to invest in won’t have reached product/market fit, but can demonstrate how they plan to get there. As you proceed on your angel investing journey, you’ll have a better sense of what are deal-breakers for your investment, and what you’re willing to forego.
A little bit of competition—especially from other early-stage companies—is a good thing: competition validates that a market exists. Hopefully, the company in question has some well-articulated advantage over the competition. Crowded markets are more challenging for investors and companies because it is harder to define a clearly superior product or differentiated value proposition when there are lots of products in the mix. Even if it is a clearly better widget, it is hard for new entrants to rise above the noise and gain significant mindshare.
In addition to looking for a first-to-market advantage, investors often look at whether the company can build barriers to competition. If the idea proves great and the company begins to get traction, they will also gain the attention of potential competitors who could move to address the same market:
Can the company lock up key customers, distributors, or vendor relationships?