Naval: At the end of the day, everything is about traction. You pick a great team, go for a big market and invest in great products because you’re trying to predict what masses of people will use or pay for. Where will their attention and money go?
Traction is the ultimate evidence. But at the seed stage, you don’t normally get the benefit of seeing it.
In an efficient venture market, if something gets a lot of traction, it also gets a lot of investment interest. If a company has strong traction, you’re competing against the top firms for a Series A or B. Everybody who’s smart knows how to read the traction metrics.
How to read traction metrics
But once in a while you’ll see a company with early traction, and you’ll have to figure out how to read it. At the seed stage, a company growing 10-20% a month is a solid company, although it depends on the metric.
If it’s less than 10% a month, you have to wonder if it’s going to be a breakout company. That’s barely over 3x a year, which—believe it or not—is too low for a seed-stage company.
At the seed stage, 20%+ per month growth is explosive. That’s a company growing at a very steep curve, nearly 9x a year. Those kinds of companies tend to have big outcomes—and tend to be very rare.
Generally, those growth curves are associated with trivial products like Yo or a viral meme. It’s the app equivalent of a cat meme, as opposed to something that’s sustainable.
The holy grail
The holy grail is a substantial product that’s sticky, monetizable and growing at 20%+ a month.
In my portfolio, Uber and Notion both had explosive growth, the ability to monetize and stickiness. It’s no surprise they ended up being multibillion-dollar companies.
On the other hand, Houseparty had explosive growth but couldn’t monetize. They couldn’t survive on the Twitter graph and ended up being a relatively small acquisition. Another example is Turntable.fm—explosive growth, no stickiness.