Nick, let me first try to provide the investor perspective. You (I mean this generically as any entrepreneur, not you specifically) may think you have built the world's best widget. You may have gotten some feedback from friends and family about your widget or talked to potential customers about your widget. And they have given you positive feedback on your widget. You likely have done some competitive analysis that indicates that your widget is better and cheaper then the competition along dimensions that you think are critical to customer choice. That would be great progress, but it does not indicate that you have achieved "product-market fit " (to use Lean Startup terminology). The number one reason startups fail is that there is no market for the product.
As an investor, I would never have the time to talk to enough of your prospective customers in depth to gauge whether you are solving a real pain point. I would not have the time to research the competition in depth. So the most effective indicator that customers are going to be willing to pay you for your product is the fact that they already are.
If you have paying customers it indicates:
- You have been able to execute at least an MVP
- You know how to find your customers
- You are able to market/sell to those customers (not necessarily at scale yet or profitably, but you can improve those things over time.)
- And most importantly, that your product solves a real pain point for customers in a way that they are willing to pay for your product rather than a competitive product that already exists.
That is why "customer traction" in terms of paying customers is so important to investors. It demonstrates that you are de-risking product-market fit. All that said, if you don't have paying customers, what are your best indicators or proxies? For example, have you put up a landing page and tested advertising to prove their is demand for your value proposition?
If you have a business model, where you don't sell directly to customers but make money on affiliate revenues or advertising, then you require massive scale. Investors have become wary of those models, because of the thin margins per customer and the fact that you need to acquire all that traffic at extremely low cost, which is harder these days since the marketplace is so crowded. If you have traction in terms of free users at large scale already, then you can get revenue by adding the ad networks. If you are not at scale in this type of business model, you need data showing that you are accelerating your user base acquisition at very low cost.
Revenue also matters, because a company without much revenue or a plan to get much revenue for a while cannot control its destiny. It will be dependent on raising more rounds of money to survive. If the funding climate deteriorates further or the company misses some milestones, there is a lot of risk. On the other hand, if a company is generating some real revenue, it can manage its burn rate, survive the tough times if necessary, and raise money on its own terms and timing.