Getting Revenue Traction To Raise Funding Or Stay Bootstrapped

Two years ago I told software startup founders that almost all early-stage VC investors need to see some revenue “traction” to consider investing.

Now, this is even more true. Professional investors and experienced angels rarely invest in pre-revenue startups.

Professional early-stage investors with seed funds know there is 10X less risk when a B2B SaaS company has 10 paying customers vs. no customers yet.

And these investors see hundreds of companies before investing in just one. They see other startups with revenue traction, so they can wait until you get some traction.

This has been the reality for years, especially outside of Silicon Valley, but it’s still a surprise for many new founders.

But now interest rates are way up and the stock market is way down, with almost no IPOs. So early-stage investing is down significantly and seed investor expectations have gone way up.

Founders get stuck in this “Startup Traction Gap” for a few reasons:

  1. They need more money to build their first sellable product.
  2. They discovered that very big customers have very long sales cycles
  3. Someone told them that most professional investors invest in ideas before revenues.

I know hundreds of early-stage software investors. Most of them do not invest in pre-revenue software companies at all. A few do, but only if there is serious pre-revenue traction.

I don’t know who is telling founders otherwise. VC investors aren’t disagreeing with me about this.

So what’s a founder to do when they are in the Startup Traction Gap?

  • Stop spending all your time fundraising and go find customers that will pay you for something
  • Don’t quit your day job and keep investing your own savings to get to some amount of revenue.
  • Create some other revenue stream to keep you alive: contract consulting, services to the same customers, whatever.
  • Get some traction that is very close to revenue. Build a huge following with a big waiting list. Get customers who use your free software now. Get pre-order commitments to buy.
  • Find angel investors IN YOUR SPECIALTY who can clearly see the need for your new product and who can help you find your first customers. These investors can invest pre-revenue because they actually feel the pain themselves.

Here’s a better answer that I wish more founders would hear earlier:

DON’T EXPECT OUTSIDE INVESTORS TO GIVE YOU MONEY. EVER.

Don’t start a startup if you don’t think you can fund it yourself somehow and grow it without any outside investment.

The more revenue traction you have, the more investor interest you will get. But if you do it right, you won’t need their money to create a valuable software company.

Raising OPM–Other People’s Money–has always been hard and it is by far the exception in the startup funding game.

Bootstrapping to revenue has always been very common, despite what we read in tech media.

Most software startups get to revenue without outside investment.

Spread the word.

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