Traversing the Traction Gap
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If we can provoke a widespread revamping of the entrepreneurial startup investment model, we believe we can have a measurable, positive impact on the world economy.
We will admit up front to a narrative bias toward entrepreneurial startups over large, mature companies, and high technology—specifically software—over other industries. The reason for the first is that while the Traction Gap can appear in any company at any time in its history, it is most pronounced in—and is the greatest threat to—small, new startups, where failure to navigate that gap can represent an existential threat.
This book is also primarily focused on B2B software startups using a subscription model: well, that’s the business we are in at Wildcat. However, we believe that the issues associated with the Traction Gap are a universal phenomenon—and that while my examples largely come from Silicon Valley B2B—and some B2C—software companies, many of these concepts can be applied anywhere and everywhere.
One final note here: you will see that I mention and feature many companies throughout this book. Specifically, I spend some time on GreenFig and Obo. These are two companies that I personally founded; I’m not just an investor. I share information about them with you as a kindred-spirit entrepreneur, not with the intention of promoting them over other products and services.
I also discuss other companies and products by name. I did this because these are companies with which I have some familiarity. Neither I nor Wildcat has received any compensation to mention them in this book. And, in almost all cases, they participate in markets with many competitors. If and when you consider using a particular product for a specific purpose that I may highlight in this book, I encourage you to actively engage and review alternative offerings and not just the companies and products I happen to call out.
I hope you enjoy this book and the business anecdotes from successful entrepreneurs very much like you, who were faced with similar issues. More importantly, I hope the book serves as an important reference manual for your own journey across the Traction Gap—or, alternatively, if you are a venture investor, for how you and your firm make investment and reinvestment decisions. When your startup or your portfolio companies survive and successfully reach the other side, please drop us a note and tell us your own uplifting story.
Bruce Cleveland & the Wildcat Venture Partners Team
San Mateo, California
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SLIDE 29
New technology startup companies have been getting it wrong for decades—and it is not their fault.
Venture capital firms not only make the same mistake, but they reward it.
Business schools that teach entrepreneurialism exacerbate the problem with future generations of entrepreneurs by not just teaching this mistake, but by concentrating on it.
What is it? An intense focus on creating great new products without an equally great go-to-market strategy that includes “market-engineering” tasks such as category creation and market validation.
As we are an early-stage venture capital firm, the vast majority of the entrepreneurs we meet have as yet few customers or consumers using their product when we first consider making an investment. In fact, in some cases there is no product at all, just a concept or prototype.
In a first meeting with an entrepreneur, I usually sit through a presentation of—on average—thirty slides. The presentation typically, in the first 28 of those slides, sets up the problem, the product, and the assessment of the market opportunity, though the latter is seldom thoroughly validated.
In this part of the presentation, entrepreneurs can—and often do—go into great detail about Product Architecture, product features, product roadmaps, and a theoretical Total Addressable Market (TAM). To their credit, most have invested a great deal of time thinking about these issues.
Slide 30 is usually the “ask” slide: that is, it covers how much the startup is raising and what it intends to do with the capital. Most entrepreneurs actually make a rational argument for the amount of capital they want; others just put down a number they hope to get. I typically ignore this request for the time being, as the investment we make must be calculated and linked to reaching key future value inflection points. To determine this amount is an exercise we like to go through with the team, using Traction Gap principles.
It is the penultimate slide, number 29, where things get dicey. I call it the “a miracle occurs” slide after the famous Sidney Harris cartoon, seen here.
Then a Miracle Occurs
FIGURE 21
Slide 29 inevitably shows a “hockey stick” graph of dramatic five-year usage or revenue projections. And where the first 28 slides went into extensive detail regarding the product, team, and TAM, Slide 29 almost never precisely articulates how the team expects to generate that spectacular growth. The “a miracle occurs” slide always seems to suggest that the presence of the new widget or application in the marketplace will magically attract thousands of customers or millions of users simply by its very existence.
If only that were true. However, as startup failure rates demonstrate, usage or revenue don’t just happen on their own. The history of the tech revolution is littered with thousands of dead products—and companies—that look brilliant on paper but failed to attract paying customers or rabid users. I have been, at various times in my career, an entrepreneur and an investor—and I have learned the hard way that just as a product must be physically well engineered, usage and revenue must be engineered as well.
In my experience, creating a powerful “growth engine” demands significant planning and a thorough and detailed go-to-market plan. This process requires a team with significant related expertise—yet the majority of the teams I meet with, while having great product-engineering skills, seldom have equally great market-engineering skills to adequately prepare their startup for the critical go-to-market stage in its life cycle. Most don’t even recognize that Slide 29 is a sign of likely failure, not the road map to victory.
A lack of requisite market-engineering skills, such as knowing how to define or redefine a category, develop powerful positioning or competitor de-positioning, and perform in-depth market research to confirm or reject proposed products and features—which must all be accomplished well in advance of entering the go-to-market phase—will invariably compromise a startup’s ability to demonstrate the traction it needs to secure its next round of financing. Unless it can grow quickly and profitably without that financing, it will be unlikely to scale. And that is the kiss of death.
So, while I am always excited by new ideas and products (that’s why I love this profession!), I have learned to be sober and pragmatic about the herculean effort and abundant capital required to successfully take a product to market and subsequently capture leadership of that market. That’s why, often to the dismay of startup teams that meet with me, I will seem to all but ignore those glorious opening slides . . . and instead focus on the young company’s market-engineering plans. I know better than to trust in miracles.
This stage is so important, I will spend the first chapters of this book telling you what you need to do to address market-engineering issues, as well as some key product-engineering issues.
The failure of most startup teams and their investors to invest in market-engineering, while still in the go-to-product phase, so they are well prepared to enter the go-to-market phase, takes a terrible toll.
The number of reported startups that begin each year is approximately 4,000 to 5,000 companies. Based upon industry data from Mattermark, of those thousands only 800 startups will ever actually raise their first, Series A, investment round. That’s an 84 percent failure rate. And the likelihood of those 800 firms getting to the next stage of investment is less than 10 percent—just 80 companies of the thousands that started down this path.
The result is this heartbreaking graph:
Startup Graduation Seed to Series A
FIGURE 32
Data from firms such as Correlation Ve
ntures and Dow Jones VentureSource confirms these dismal statistics.
To put a finer point on these failure rates, according to Professor Shikhar Ghosh of the Harvard Business School, roughly 75 percent of US venture-backed startups—the cream of the crop among new companies—fail. Ghosh’s research also has found that 30 to 40 percent of quality startups end up liquidating all their assets—in other words, nothing of them survives. Ghosh further suggests that if startup failure is defined as “not delivering the projected return on investment,” then 95 percent of VC-backed companies are failures.
■ Startup Failure Definitions and Rates3 ■
STARTUP FAILURE DEFINITION
FAILURE RATE
Liquidating all assets, with investors losing most or all the money they put into the company
30%–40%
Failing to see the projected return on investment
70%–80%
Declaring a projection and then falling short of meeting it
90%–95%
Here are just five examples, taken from hundreds of defunct startups documented in CB Insights, a tech market intelligence platform, each year. These are companies that set out to change the world, but instead ended up on the scrap heap of failed dreams.
MobileIgniter—A company that helped users aggregate content from CMS, CRM, or custom platforms and publish that content as an iOS or Android application. “[W]e found that the sales cycle for the market we specifically wanted to go after is just way too long for a small company to absorb. Originally, we estimated that the sales cycle would be somewhere between three and six months. We then adjusted that to say it’s nine to 12 months. . . . We hope to see IoT embraced by manufacturing and ag in the state and in the region. But it’s not going to be because of us.”
Cha Cha—A site dedicated to answering consumer questions. It failed to acquire enough advertisers to support its operations.
Shoes.com—An online shoe retailer that, according to its CEO, “failed to generate enough market awareness and [suffered from] poor customer service.”
Rendeevoo—A dating app company. One of its veterans explained “We never managed to raise the next round in time; so . . . the ugly reality slapped us hard. Bills were piling up on the business but also on our personal lives.”
Hivebeat—This startup developed a way for student organizations to promote and manage events on campus. “We never hit a real product/market fit,” recalled one of its founders. “Our product was great, but it wasn’t a 10x product. We had a much prettier product than the competition, but we were always lacking features in every niche.”
CB Insights has captured statements from hundreds of failed startups that tell similar tales of woe.
I am a founding partner at Wildcat Venture Partners. We are a relatively new venture firm, formed in 2015, but each of us has been a successful venture investor with other firms for at least a decade. So, when we came together to form Wildcat Venture Partners, we spent a significant amount of time discussing and planning how we wanted to run our firm, the areas of investment interest we shared, and the investment decision-making processes we wanted to adopt. We also conducted an in-depth analysis of the successes, failures, and lessons we had learned along the way, in order to avoid making the mistakes again.
As a part of that process, we examined our personal investment records and—in stark contrast to dreary industry statistics—we were pleasantly surprised to discover that nearly 70 percent of the very early-stage startups—more than 2 out of 3—we had backed over our individual venture careers had made it through this challenging go-to-market phase.
The problem was that we weren’t sure why. We liked to think we were just smart. But everybody in venture capital is smart—otherwise investors wouldn’t entrust them with billions of dollars to invest. So we set out to explore what our careers had in common. Perhaps the secret lay hidden there.
The closer we looked, the more we realized—to our surprise—that while we didn’t necessarily use the same language, all of us had had similar experiences and used similar approaches when working with our startup teams.
In one of our Wildcat planning sessions, I introduced an investing and operating framework I had developed over the previous few years at my former venture firm. I called it the “Traction Gap Framework.” As I took us through its concepts, everyone was quick to recognize its relevance, embrace its terminology, and begin contributing new concepts based upon their own individual experiences.
Today, the Traction Gap Framework is a composite of my own and the Wildcat team’s collective experiences, along with some great contributions from others as well. At our firm, we now all use Traction Gap vernacular and principles with our portfolio companies as both an operational and financing strategy.
Traversing the Traction Gap
In their seminal works on startups, authors Steve Blank (The Startup Owner’s Manual) and Eric Ries (The Lean Startup) do an outstanding job of explaining the challenges associated with the first phase of a company—what I have labeled as the go-to-product phase. They coined the term “lean startup,” based upon lean manufacturing concepts and principles originally developed by Toyota, to reflect a startup team’s need to quickly identify the market opportunity, validate that opportunity, and reach “product/market fit” with a Minimum Viable Product (MVP).
In Chapter 4, “Getting to Initial Product Release,” I build upon their key concepts by introducing and explaining what it means to be “market-first”; why it’s critically important to test products and features with statistically validated market research before committing to build them. I also introduce new terms, concepts, and tactics you can use both to ensure that you are building a product the market wants and to show you how to plan for getting it cost-effectively and efficiently into market—before you officially enter the go-to-market—Slide 29—phase.
I mentioned Geoffrey Moore earlier. He is an iconic business author and speaker, and one of my partners at Wildcat Venture Partners. Through his many books and lectures, he has shown companies how to think about markets, “cross the chasm,” and begin to successfully scale a product—what I have labeled the go-to-scale phase.
Yet, surprisingly, very little practical and prescriptive advice has been captured and published discussing what startups should do to successfully make it through that middle go-to-market phase. This is the devastatingly critical period of time between the go-to-product and go-to-scale phases—the phase that destroys the vast majority of startups and even kills new products within existing companies.
I have observed that most startups are able to create a first product on the initial capital they raise. Yet time and again, these companies falter when they take those initial products to market.
This challenging go-to-market phase is the Traction Gap.
The Traction Gap Framework
FIGURE 4
Over my more than 25 years as an entrepreneur and early-stage venture investor, I have tackled these problems head-on. My goal in the pages that follow is to provide practical advice any startup—or new-product team in an existing company—can use to help successfully traverse the Traction Gap. I will provide you with the “missing link” between the “lean launchpad” and “crossing the chasm.”
In each chapter, I will showcase how—and when—you should move from one phase to the next, complete with valuable insights, tips, and tricks others have used to successfully traverse the Traction Gap and go on to scale.
■
TRACTION GAP FRAMEWORK OVERVIEW
To begin, I lay out the Traction Gap Framework so you can become familiar and comfortable with its terminology.
The Traction Gap Framework is broader than just the Traction Gap alone. It begins with the go-to-product phase. As you will read in these first four chapters, you have a lot of work to do in the go-to-product phase to prepare yourself for the go-to-market phase. This is why I spend some time on t
he go-to-product end of the spectrum. But the actual Traction Gap spans from a startup’s Initial Product Release (IPR) to Minimum Viable Traction (MVT), which we define as a point in a company’s maturity—whether it is a certain level of revenue growth, engagement, downloads, usage, or other variables—that demonstrates market validation and signals a positive growth trajectory. (These milestones also apply to a new product launched from within an existing company.)
■
TRACTION GAP VALUE INFLECTION POINTS
A quick word about the acronyms you see on this graph, as I will be using them throughout this text.
Startups must successfully reach a series of increasing value inflection points in their path along the Traction Gap. These points include:
Minimum Viable Category (MVC): Reaching this value inflection point is a critical part of the market-engineering process. You must develop and validate the name and definition of the category your startup is attempting to create or redefine—and provide evidence that it is capable of supporting a startup. MVC is a key part of the Traction Gap Framework. Before you even start developing your product, you need to think about the category you must create (or disrupt) and define. Playing in someone else’s category is fraught with peril and results in many startup failures. This marketing milestone must be reached well before entering the Traction Gap.
Initial Product Release (IPR): First publicly deployed product iteration. IPR is when the startup first makes its product generally available to the public. In many cases, this is the “Beta” version of the product. At this stage, the team is seeking customer validation metrics to prove it has developed an MVP. This milestone signals entry into the Traction Gap.