Traversing the Traction Gap
Page 1
BUSINESS & ECONOMICS—Entrepreneurship
US $35.99 | CA $46.99
Startups Don’t Have To Fail
Vision, groundbreaking ideas, total commitment, and boundless enthusiasm characterize most startups, but they require capital to go from promising product to scalable business. More than 80 percent of all early-stage startups fail. Most of them can build a product, but the vast majority stumble when it comes time to take those products to market due to poor “market engineering” skills.
Traversing the Traction Gap exposes the reasons behind that scary failure rate and provides a prescriptive how-to guide, focused specifically on market engineering techniques, so startups can succeed.
The go-to-market hurdle is insurmountable to many startups. Just when they most need to establish a foothold in the market, they run short on time and money. This is the Traction Gap, that period of time introducing a new product into the marketplace and being able to scale it during a rapidly closing window of opportunity. Traversing the Traction Gap is a practical guidebook for navigating the tumultuous early life of a startup. Based on real-life examples, the advice from Cleveland and the members of the Wildcat Venture Partners team, provides a roadmap and metrics for succeeding where others have failed.
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Copyright © 2019 by Bruce Cleveland and Wildcat Venture Partners
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Library of Congress Control Number: 2018958128
First edition: February 2019
Hardcover ISBN: 978-1-63576-573-1
Trade Paperback ISBN: 978-1-63576-624-0
eBook ISBN: 978-1-63576-574-8
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Interior design by Pauline Neuwirth, Neuwirth & Associates
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I, along with the Wildcat Venture Partners team, wrote this book for you; the brave entrepreneurs who dare to change the world and make it a better place for us all.
CONTENTS
Foreword by Geoffrey Moore
Part I LEARNING THE CONCEPTS: The Traction Gap Framework
Introduction
1 Slide 29
Part II GETTING THERE: Slides 1–28 “Go-to-Product”
2 Applying the Traction Gap Framework
3 The Road to Category King
4 Getting to Initial Product Release
Part III NAVIGATING THE GAP: Slide 29’s “Go-to-Market”
5 Getting to Minimum Viable Product
6 Getting to Minimum Viable Repeatability
7 The Final Sprint to Minimum Viable Traction
Part IV SCALING TO SUCCESS: After Slide 30 “Go-to-Scale”
8 Beyond the Traction Gap
Appendix
Endnotes
Acknowledgements
Index
FOREWORD
by Geoffrey Moore
The whole point of this book, as Bruce makes clear in his introduction, is to radically reduce the failure rate of venture-backed startups, specifically during their metamorphosis from promising product in a potential blockbuster category to scalable business highly attractive to later-stage investment. This is the murky territory of detecting and securing market-product fit, a term Bruce introduces and defines in the book, at a time when it is critical for the entrepreneur and the sponsoring venture capitalists to be on exactly the same page.
Traversing the Traction Gap shines a very bright light on this transition in two important ways. First, it prescribes objective, quantifiable milestones that guide the journey through four stages, from Initial Product Release to Minimum Viable Traction. Second—and this is the unique contribution of the book in my view—each stage directly equates to a step-function change in valuation for the budding enterprise. That is, not only are these market-development milestones, they are venture-funding milestones as well. As a result, the framework directly aligns the entrepreneur with the investor on how a specific funding event translates into a subsequent uplift in company valuation.
This connection between entrepreneurial innovation and venture valuation has never before been made this clear, and, as a result, far too many venture-backed startups wandered off course, not because they were doing poor work, but because they weren’t doing the right work at the right time. As a result, when they went to get their next round of funding, what they heard from investors was “You’ve done some very fine work here, but we’d like to see you get a bit more traction before we invest.”
Traction. That was the word that haunted their fundraising lives. What is it? Why is it so elusive? How do you get it? How do you demonstrate it? These are the questions that the Traction Gap Framework helps management teams and their investing sponsors address.
At Wildcat Venture Partners, where both Bruce and I work, we have been using this framework with every single one of our investments, first informally, and now formally via the Traction Gap Institute. It is proving invaluable both as a navigational device to chart courses through the unpredictable currents of disruptive innovation and as a communication device to keep us aligned with our funded CEOs and their teams. Along with Bruce and the rest of the partners of Wildcat, we hope that you too can leverage this guidance to entrepreneurial success.
INTRODUCTION
This is an unusual business book.
Unusual because unlike many business books, we have set out to provide you with a set of prescriptive techniques and tactics you can leverage with your own startup—or with your portfolio companies if you are a venture investor. We are venture capitalists and entrepreneurs, not academics; our orientation is toward real-life business success, not interesting theories. We will always choose messy successes over elegant failures.
This book contains valuable lessons that my Wildcat partners and I have learned in our careers, combined with tried, tested, and proven techniques used by teams to successfully traverse one of the most challenging phases in a startup’s life cycle: we call it the “Traction Gap.” As you will see, this journey is almost never smooth. That’s why this is a guide, not a bible. Every entrepreneur’s experience will be different.
Why should you value the advice in this book? Well, I, along with the members of the Wildcat Venture Partners team who have contributed to its contents, have been involved with successful Silicon Valley companies and the technology industry in some manner for at least twenty years.
I have held operating roles in several Silicon Valley technology companies that were small startups at the time I joined them. At Oracle, I began as a mid-level manager when it was a private company of 100+ employees located on Sand Hill Road in Menlo Park. At 27, I was given the opportunity to build a division, and in less than four years we grew from a “startup” inside Oracle to a major contributor to Oracle’s top line. After Oracle, I joined Apple and ran its Unix and object technology divisions. In 1996, I joined Siebel Systems as a member of its senior executive team just after it completed a
$2M year; five years later, we generated $1.7B in revenue. All three companies are among the most transformational technology companies in Silicon Valley history.
After we sold Siebel to Oracle in 2006, I elected to try my hand at investing in startups as a member of a venture firm. One of my first investments was in Marketo, when it was essentially just an idea with three talented people. This small team was led by Phil Fernandez, who went on to transform the marketing function as we know it. With C3, I was invited by Tom Siebel to participate in helping the company form its original business plan and then subsequently invest in it; and when Doximity’s founder, Jeff Tangney, sat in the offices of my former venture firm as an Executive in Residence, I had the privilege of watching him work his way through the process of selecting one among three ideas he was contemplating and go on to create a market-leading application for physicians and the healthcare industry.
My Wildcat partners have each had similar experiences, helping to either build or advise startups to go on to become successful market-leading companies.
As such, we have had a front-row seat where we have learned what is required to take an idea from startup to category leader. These invaluable experiences, working with incredible people, serve as the foundation for the principles developed and documented as part of the Traction Gap Framework.
What compelled me—and my Wildcat partners to encourage me—to write this book? It was a troubling statistic. More than 80 percent of all startups fail, according to Dow Jones VentureSource, Correlation Ventures, CB Insights, and other sources. And the percentage may be even greater than that.
I am talking about thousands of failed companies every year. Many entrepreneurs believed they had valuable, important new products . . . and yet they failed, in spite of their belief and their best all-out efforts.
These companies either failed outright or failed to return at least the capital invested. This is a tremendous waste: lost capital, lost jobs, and lost dreams. Some of the smartest people in our economy invest significant amounts of time, effort, and capital that ultimately produce no tangible result. And here’s the worst of it.
Most startups can engineer a product; but, sadly, the vast majority stumble when it comes to engineering a market for that product. Just as important as the product itself is accurately assessing and validating market need for that product, then defining or redefining that market, so that their beautifully engineered product has a chance to succeed. To do any less is a colossal wasted effort.
As early-stage investors, we wanted to expose the reasons behind that 80 percent failure rate, especially when venture firms widely proclaim their ability to “add value” as a core competency.
What we have discovered—what I will discuss in depth in the pages that follow—is that every startup must pass through three distinct phases:
Go-to-Product,
Go-to-Market, and
Go-to-Scale.
For negotiating the go-to-product phase, founders have a tremendous amount of information and support for their startup. Incubators, accelerators, angel investors—all are ready and eager to help. For example, Steve Blank’s excellent book, The Startup Owner’s Manual, is a phenomenal reference for any startup team seeking to navigate the go-to-product phase.
That said, I have elected to devote a significant portion of this book—the first four chapters—to exploring some critical issues in the go-to-product period. The issues I discuss have not been dealt with as readily, yet are mission-critical; and if you do not address these issues satisfactorily, they will at a minimum compromise your success or, worse, lead to an early shutdown.
I will introduce you to terms, concepts, and strategies that will enable you to navigate and exit the go-to-product phase, prepared to take on and successfully traverse the Traction Gap, the meat of this book, what I later term “Slide 29.” You’ll read a lot about Slide 29 in Chapter 1 and throughout this book.
For those relatively few startups that actually make it to the third—go-to-scale—phase, a significant amount of information and support exists for them as well. Consultants and books abound with information that can help founders “cross that chasm” (to paraphrase Geoffrey Moore’s title of his best-selling book) and begin to scale. We are privileged to have Geoff, the master of marketing challenges, as one of our partners here at Wildcat Venture Partners, and I know he agrees with what I am about to tell you:
While there is a substantial amount of information and support for the first and third phases, there is very little data or support for teams making their way through the second—go-to-market—phase.
Very few business metrics exist at this point in a startup’s life cycle. So spreadsheet analysis offers little help to the management team as it attempts to develop a category, define it, and create sophisticated demand-generation and revenue-conversion programs.
This lack of internal and external support could not come at a worse time. Startups in the go-to-market stage face tremendous financial risk. They have a limited amount of time to figure things out and get them right. In many ways, they are never more vulnerable.
It is this dangerous and tumultuous period that we have labeled the “Traction Gap” and presented as the main topic of this book. Fail to generate sufficient traction during this phase, and your startup will never get the opportunity to cross the chasm to its next era of growth. More likely instead, it will come to a sad and dismal end. However optimistic your beginnings, you will end up on the scrap heap of the 80+ percent.
I wrote this book, with my Wildcat partners’ significant input and support, to help you keep that from happening.
Soon after documenting and formalizing the Traction Gap Framework and determining a set of best practices, the Wildcat team shared the findings with portfolio companies and startups to get their feedback.
The response was overwhelmingly positive. Many entrepreneurs asked us if we would write a book about the Traction Gap—and how to successfully traverse it. I volunteered to take on the challenge. After considerable effort, significant and wonderful contributions from my Wildcat partners and others, and a lot of field testing, here it is.
Our approach is not just to characterize the Traction Gap, but to show how understanding it will profoundly impact your product introductions as well as your product creation, marketing, sales, and support—and your financing.
In fact, if there’s one important discovery we’ve made in our research into the Traction Gap, it is that most entrepreneurs don’t really understand that they need to engineer two products: one that they sell to businesses or consumers, and the other a financial product—their company—that they must sell to investors. In Chapter 2, “Applying the Traction Gap Framework,” I talk about developing a capitalization strategy. To secure capital, you typically must recruit outside investors. You must be able to persuade those investors to commit to your idea and startup; you aren’t selling investors a consumer or business product or service, you are selling them a financial product. Consequently, your approach and content with investors must be different.
One of the common mistakes I have seen inexperienced entrepreneurs make is to simply take the product deck they might use with a potential customer, add a financials and a team slide, and use that to try to raise capital.
The lack of understanding how to market and sell to investors, coupled with how much and when to capitalize a startup, are key contributing factors to the failure of many startups.
I will explain all this in detail in the pages that follow. I know I speak for my partners when I say that if we can save one promising startup—or get one of our professional venture peers to reconsider their investment evaluation model—we will consider this book a success.
Every venture firm, entrepreneur, angel investor, and limited partner tends to refer to a startup based upon its latest financing round—Series Seed, A, B, C, . . . and so on—and we are forced to use those terms as well because they are the accepted indust
ry vernacular. But financing rounds are actually a terrible proxy for a startup’s maturity. In fact, they provide little insight into the true progress of these formative companies. I hope to convince you that by using Traction Gap Framework’s terminology, labels, and metrics, we will all have far better clarity into a startup’s actual maturity.
The following is a representative sample of startups that the members of the Wildcat team have invested in and the name of the financing round when one of us first invested.
Traction Gap Framework
with Company Financing Rounds
FIGURE 1
Notice that there is little correlation between the name of the round and the maturity of the startup. My Wildcat partner, Bill Ericson, and I invested in a database company that didn’t reach MVP until after its fourth round of financing. Why? Because it takes a lot of capital to produce a commercial database. We are experienced investors in this area—databases and infrastructure—and the fact that it took this much capital to reach MVP did not come as a surprise to us. In fact, we allocated significant follow-on capital from our initial investment to support the company for this very reason. A mobile consumer app might take only one or two rounds of capital before it’s off to the races and scaling.
The simple truth is that financing rounds don’t tell anyone much of anything other than that the startup successfully raised capital, which is most assuredly not a barometer of future success.
When venture firms provide an annual accounting and assessment of their early-stage portfolio to their limited partners (LPs—the investors in venture capital firms), we believe that adopting and using Traction Gap value inflection points, metrics, and nomenclature is a far better way to convey the true progress of those startups, rather than referring to their funding rounds. At Wildcat, we use the Traction Gap Framework vernacular with all portfolio company interactions, when we make investment and reinvestment decisions, and when we report the progress of our portfolio startups to our LPs.