Does a compelling story trump strong traction when fundraising?

Fundraising is one of the most difficult things a founder has to do. And I suspect, given the current market conditions, it’s even more difficult now than in the previous seven to 10 years.

A common question we get is: “Which is more important: strong traction or a strong story?” But what is strong traction and a strong story — and why are they important?

Photo credit: Ketut Subiyanto

Traction

A startup typically has strong traction if:

• It is growing 5% to 7% weekly
• 40% of users are still using the product after six months

I say typically because this is greatly dependent on the company’s stage and industry.

Growth should be much faster for startups in the very early stages but slower for those in the series A phase and beyond. Similarly, consumer social products tend to have lower retention than B2B services.

Story

Meanwhile, a startup has a strong story if it has a compelling thesis about how the world should be and how it plans to get there. Typically, they start with a familiar observation, followed by something surprising (a secret), and end with a strategy that takes you from the familiar to the surprising.

Let’s use Airbnb as an example. The company observed two things:

1. During peak times, hotels are packed and become very expensive.
2. People want a more authentic, unique experience when traveling.

Its secret:

1. People have plenty of room in their homes.
2. They’re willing to rent it out on a short-term basis.

Its strategy:

1. Focus on large cities especially when there are events.
2. Target young people who are most cost-conscious and more willing to stay in other people’s homes.
3. Siphon traffic from Craigslist by posting its own listings.

Cases

Observations