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Should You Pay Up for Team or Traction?

Rob Go
January 12, 2015 · 4  min.

As an early stage investor, should you pay up for team or traction?

I posed this question on Twitter in Dec and got a bunch of different opinions.  It’s something I’ve been thinking a lot about recently.  Prices in the startup world are relatively high.  And as a firm, we generally believe that there isn’t a “sub-prime” market for VC.  This means that while it may be possible to find the odd “cheap” deal here and there, the goal is to invest in the best opportunities, which often come at market prices.

This question isn’t just relevant to investors either.  When you are thinking about joining an early stage company, how should you be evaluating the risk of the overall company?  How should you be weighing the presence of a great founding team vs. early signs of traction?  It’s not totally intuitive.

The Case For Team

The case for overpaying for team goes something like this. Great teams find traction.  Great teams also know what to do with traction and can work from there to build a company of value.  Great founding teams also attract other great team members, so the advantage compounds.

Teams are durable, traction less so. Traction is fleeting for a bunch of reasons.

1. You may only get traction with a small set of early adopters that will never translate to mainstream users

2. Your product may have gotten traction due to some distribution hack or novelty factor, both of which may not lead to sustained usage and growth

3. You may not be able to control the operational complexity and economics of your business even though there is a lot of demand

4. Barriers to entry are so low in software that new entrants can always steal your thunder, and sometimes draft off your early learnings

5. It is hard to translate rapid end user adoption with actual business success (eg: monetizing a large audience, or moving from end-user SAAS to enterprise sales).

So, if you are going to pay up, pay up for team. If there is “conventional wisdom” here, I think this is it.

But a counter-argument can also be made.

The Case for Traction

The case for traction is some version of this.  Going from 0 to 1 is really really really hard.  Great teams fail to build a product and get early distribution successfully all the time.  But when something is working, it doesn’t matter why or how it happens, it’s such a rare occurrence that you need to pay extra special attention.  Also, great teams are much harder to identify for a bunch of reasons.

1.  Teams that seem great on paper or by reputation may actually not be great.  They may have just been lucky. We tend to overly-ascribe value to individuals sometimes, when luck or circumstances had more to do with one’s track record than their actual capabilities.

2. Greatness doesn’t always carry over in different contexts. For example, different type of products, different go-to-market challenges, different market context, different stage in one’s life, etc.

3. Great companies are often founded by first time founders who don’t seem obviously special.  For every David Sachs, you have a David Karp.  Karp turned out to be pretty extraordinary, but it wasn’t obviously so when Tumblr got started.

On top of this, there are probably a lot more people in the world who are capable of taking something from 1 to N, vs. 0 to 1.  So if you have a company that has traction, attracting talent to augment what’s already working is quite doable.

Traction for Consumer, Team for B2B

A more sophisticated answer to this question is that broadly speaking, you want to pay up for traction over team in consumer, and overpay for team with less traction in B2B.  The observation is that founders of great B2B companies more often then not have some demonstrable track record as operators or entrepreneurs.  This is less often the case for consumer. Generally speaking, this is because of what it takes to get early distribution in these markets.  In B2B, more of the distribution challenges for certain types of products are in the team’s control.  Someone with experience and relationships are better at landing early customers, negotiating more favorable deals, building out and managing a sales team, raising more money earlier to build a more robust product, etc.  In companies that require more viral distribution, a great team still has an advantage, but perhaps less of one. Often, consumer companies that gain early traction do so on completely new, emerging distribution channels that an experienced operator who is used to working at greater scale is completely unfamiliar with.

In my view though, it’s less about a consumer vs. B2B dichotomy and more about what distribution channels a company is going to take advantage of and how early growth and monetization are likely to happen.

The Founders Perspective

This post is mostly from the early stage investors perspective, but what does this mean for founders?

In a world of constrained resources, founders are in a way “paying up” with each hiring decision or dollar they spend.  So they are similarly making the judgement of where to be allocating resources.  A very common mistake I see some companies make is hiring a very seasoned marketing executive way too early, and then realizing that it was a mistake to pay-up for team at that moment in time.  The converse is that I’ve also seem companies choose not to stretch to bring on more senior or more expensive talent when the time was right, and then lament “I wish we had hired her 6 months ago”.

Not “paying up” when the time is right is a challenge for founders broadly.  It is true that it pays to be conservative with cash early on and that being lean or being CFBE gives you a lot of leverage. But in a world of asymmetric outcomes, it’s important to make big bets and pay up even if it feels uncomfortable.  But as both investors and operators know, choosing the right things to pay up for, and doing it at the right time is easier said than done.


Rob Go
Rob is a co-founder and Partner at NextView. He tries to spend as much time as possible working with entrepreneurs to develop products that solve important problems for everyday people.