By By Ulvi Rashid
Founder, Finance and Investment Director at Traction Fund
During a recent call with an incoming investor at Traction Fund, I was asked a simple but weighty question:
“Why is Traction Club so consistently right when it comes to investing or passing on early- and growth-stage enterprise startups?”
First of all, John (let’s call him that), I told him, we’re not fortune tellers. But there is a method behind the success we’ve had.
Below, I’ll share what we do, why it works and how it stands apart from conventional approaches.
Why Enterprise Startups Are A Golden Grail For VC Investment
Our firm’s focus is exclusively on the enterprise market. The consumer side of the startup ecosystem is unpredictable, often hinging on volume strategies and, in many cases, luck. Enterprise markets, by contrast, offer a level of predictability and measurable ROI that aligns better with our methodical approach to investing.
The Conventional Approach
Investors typically begin due diligence by asking founders about the problem they’re solving and the size of the market. It’s a good starting point. But often, the answers you get are founder-driven narratives, punctuated with impressive market figures from consulting reports. The problem, they say, touches on hundreds of billions in market demand—a quick multiplication exercise that makes it seem like opportunity is everywhere.
Next comes the traction question. Who are your customers? A few big names scattered across different sectors can give the impression that the solution has broad appeal. It feels reassuring.
Then, investors dive into usage. For SaaS companies, metrics such as daily active users or monthly active users dominate the conversation. If those numbers look strong, the founder progresses through the sieve.
Eventually, the exit question emerges. Is acquisition part of the plan? If the answer is yes, it signals a potential upside.
Finally, as a last step, investors request an executive reference call. If the client says good things, the check gets written.
Why The Conventional Approach Falls Short
This all seems like a logical way to approach early-stage investing.
But it’s also where many investors get it wrong. Here’s why:
Product-market fit assessments can be deceiving.
Pilots are often shown as a sign of product-market fit, but in my opinion, they mean little. A 2024 Deloitte report shows that the majority of AI pilots fail. The right question isn’t about market size but whether the solution addresses a pain so sharp that it’s like an axe in the back—not a scratch on the knee.
A broad but short list of customers signals a lack of demand.
Customers across industries may sound exciting, but early-stage startups that chase clients across sectors and geographies often lack focus. Maintaining quality, customer success and support across borders isn’t just hard; it’s an inefficient use of capital.
SaaS metrics applied to AI companies are another pitfall.
For AI-driven process automation, traditional metrics on daily or monthly usage can mislead investors. The goal of AI is automation—eventually reducing human involvement. AI agents learn through human-in-the-loop oversight, and once trained, they operate with minimal intervention. Declining DAU and MAU can indicate success, not failure.
Investors want an exit but don’t want founders to seek it.
As for exits, if a founder is already planning to be acquired, we pass. The best founders are missionaries, not mercenaries. They build for long-term advantage, not short-term acquisition milestones that shift with the whims of the market. The difference between those two paths can determine whether you are a category leader or a fleeting trend.
And those meaningless and costly reference calls?
I’ve never had a founder connect me with a dissatisfied client. More often than not, executives feel invested in the founder’s success. Helping them raise funds keeps the startup alive and the product they rely on in business. These calls consume investors’ time and the social capital of founders and rarely reveal anything critical.
A Different Investment Approach
How do you avoid these traps and increase your odds of picking winners?
Start by getting customer feedback.
Our process begins with executives who are happy customers of startups. From the outset, we gather feedback on whether the product delivers, where it needs improvement and how urgently customers want it. We don’t guess but know the ROI, the price customers are willing to pay and the speed of deployment.
To assess market sizing, work backward from this executive insight.
Pricing, adoption rates and deployment times shape our market assessments. This isn’t an arbitrary percentage from a consulting report. It’s a ground-up, company-specific view of potential growth.
For traction, prioritize concentrated success.
For example, consider a startup that has landed 50 of the top 250 U.S. law firms versus one with six clients scattered across healthcare, retail and banking in five countries.
Apply AI metrics to AI companies.
Automation usage diverges from SaaS patterns. The best automation tools see declining user engagement because the AI performs the work. Enterprises want processes to run automatically, not through constant user interaction. We measure value by the process’s importance, not by how frequently people log in.
Have a plan B in case a startup doesn’t take off.
We tap into our network of investment bankers to understand potential exits. Who might acquire this startup, and under what conditions? Aligning that insight with the startup’s trajectory helps us anticipate when they’ll be ready for acquisition on favorable terms.
Although our method is not foolproof, it helped us to say “No” more often per each confident “Yes” than we would do with conventional methods.
Founders appreciate our “Traction Method” because we bring them early customers and actionable feedback rather than draining their goodwill with reference requests. Our LPs value the process because it lowers risk and enhances confidence.
If this approach resonates with you, consider giving it a try. You may just find your first or next winner faster than ever.
The post Reversed Due Diligence:How To Pick Enterprise Winner first appeared on Mediamark Digital.
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