Why investors are looking for more tractions, even in early stages?

In a recent talk with a founder, we agreed that it’s becoming harder and harder for startups with few tractions to get invested. Early stage (= seed to series A) investors are asking for more tractions (more than they used to be). This is not the first time I heard someone talking about this. I am pretty sure anyone in the local ecosystem will tell you the same.

At first, I thought the reason is that more investors with bigger check size (but still at early stages, I mean) coming to the market => they prefer investing more money in the teams with clear signs for success. Since traction is one of the best signs of success, they will ask for more tractions in early-stage companies. But I came up with another reason that I think pretty reasonable too.

It’s because most nowadays business models are somehow proven

Popular business models are marketplace, e-commerce, ride sharing,… They all took time to be proven true globally. And the time they needed to prove that they work well in Vietnam market passed already, I think.

• You no longer have to convince investors that e-commerce will work in Vietnam because Tiki, Shopee, Lazada, Sendo already did
• You no longer have to convince investors ridesharing will work in Vietnam because Grab, Uber already did

So as a matter of fact, no investor is going to invest in your company to prove this proven model true (= to gain tractions). They only invest in these models to see them grow, which means they need to see good tractions before they invest. So if you want to raise money with those models, your job is to convince investors that your company is doing better than other similar guys in some way:

• Your e-commerce platform is doing better than Tiki in terms of healthcare products
• Your ridesharing is doing better than Grab in terms of car quality

And all of this “doing better” need tractions to be believed!

So if you’re already in businesses with those models, it’s very important for you to (1) think how you’re going to differentiate yourself with key players (2) use your capital very efficiently because you’re not going to raise fund till you gain good tractions (3) you should know your competitors well to know how much traction is considered good. If you’re thinking of starting a business with those models, I personally do suggest that you think carefully about the resources you have before jumping into that. In fact, I think you’d better

Work on things that need proving true

Investors might invest in teams pre-products or few tractions if their business models are new and potential in a specific market (in this case, Vietnam). They can be a model proven in other markets. Because they’re new so early-stage investors understand that it needs time. Because they look potential so early-stage investors expect high risk, high return. In my opinion, some of them are:

• tech propriety: AI, biotech,…
• new business models: ie. direct to consumer (D2C — I believe that more investors are in love with this model), online merging to offline, going to vertical, …

So to sum up, my points are: for early — stage fundraisers

• if you’re working on a proven business model, then you’re expected to have good tractions to raise fund
• if you’re pre-product or just have few tractions, you’d better work on the models that still need proving.

P.s. So how to know if your business model is already proven or not? Reading fundraise news, looking at the market landscape reports, asking investors directly should be good, I think.