If you speak to many investors about what’s important, a common response is ‘team’. It’s all about teams, apparently. At best, this is a half-truth – and here’s why.

At early stage, most investors are shooting in a dark room. They can take a guess at what might work, but that only gets them so far. The ‘team’ mantra has been concocted to deal with this problem. If you invest in a good team they may fail at Plan A. If they do, they’re more likely to stick around, and more likely to pivot successfully to Plan B, than would a weak team. So there’s at least some logic here. But ‘team’ is largely claptrap. Why?

Investors claim to back teams because they struggle to find quality. If you look at feeding frenzies among investors, these have nothing to do with teams. They’re all about the startups that are rocketing ahead. Team may be a reason for this Great Leap Forward, but it’s not why the investors are piling in. So what’s the appeal that investors really look for?

It’s really simple. To make a credible investment case, you need three basic elements: Margin, scale and traction. Let’s break this down:

Margin is pretty simple. On the web, it’s often the easiest of the three to obtain – particularly in utility and B2B apps, which typically use a paid-for model. Paid digital products are inherently high-margin in most cases, so you just don’t get the profitability issues that old-fashioned firms do, such as car manufacturers. Another copy of your app doesn’t cost you much to produce. The only common exception to this logic is free or freemium models, where the revenues per user can be so tiny that you don’t cover even basic costs such as bandwidth. But this disguises a major problem, which many weak entrepreneurs forget: marketing costs. If you can’t acquire a user at a price below the lifetime value then you’re sunk. Particularly in Europe, a failure to achieve strong early margins often sends investors running scared (US investors are far better at trusting their guts that margins will later be found from engaged audiences).

Scalability is often faked, but more rarely found. You have to be pointing at a billion-dollar market to be a billion-dollar company. Too many firms claim a broad market, whilst making one of two key mistakes. Firstly, they may be too specific – niche products which are stuck in a particular industry or geography (and often both). Without very high revenues per user, niche brands are cornered in minor markets as lifestyle-type businesses. There’s no shame in that, but no investment case, either. Secondly, firms often try to be too general – having a limited appeal to each user cohort, which limits their ability to find traction. Only by having a broad ultimate target, but a tight initial focus, can a firm find and crack a market. Pick a sub-market that your product appeals to – enough for them to pay. For example, if you want to get sports clubs on board worldwide, start with tennis clubs in London. This stepwise approach will let you scale efficiently – whilst keeping sales activity focussed, user benefits clear, and margins high due to control of marketing costs. Ensuring that sub-markets lead to bigger things is crucial. Make sure you keep the next scaling opportunity in mind, as you grow geographically or by expanding your niche.

Finally: traction. Not only is this the hardest to find, but it’s also the most important. Everything’s academic without evidence that people are buying. This can take many forms: paying deposits, filling a cart with non-existent products, or signing up for ‘coming soon’ accounts. These are all examples of traction. But of course, nothing beats cold, hard cash from paying users.  And traction is nothing without growth – which absolutely has to be real growth, not just churn.  Signing up a new customer as another one cancels does not equal two customers!

Ensuring your stick to the goals above will enable you to go somewhere exciting once you’ve taken the first baby steps. As soon as you’re in a position to clearly demonstrate the crucial success markers of margin, scalability and traction, investors will forget all about your team. Then, the feeding frenzy will start.