Traversing the Traction Gap

by Bruce Cleveland

  If you want to learn more about how to build a successful partnering program, I encourage you to read the Harvard Business School case study titled Siebel Systems: Partnering to Scale. You can do a simple search: “partnering to scale Harvard Siebel” and find the study. Download a copy; it provides a prescriptive, detailed framework and overview of how to build and staff a partner program that can help you successfully scale.

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  GETTING TO MINIMUM VIABLE REPEATABILITY

  Reaching the next value inflection point, Minimum Viable Repeatability (MVR), is the most challenging phase you and your startup team will face in traversing the Traction Gap.

  Not to be overly dramatic, but, as far as the venture investment community is concerned, your ability to achieve MVR from MVP over the subsequent year-and-a-half—in what will be a shockingly short 18 months—will determine whether your startup lives or dies. Remember: the Traction Gap Framework is as much about creating a financial product for venture investors as anything else.

  Making this challenge infinitely worse is that now, in this phase of your startup, you essentially are no longer in control of your fate. In the go-to-product phase, from Ideation through MVP, you were in charge of your destiny. You decided which features to build and which initial consumers/companies to work with. During that phase, you were principally concerned with creating a product that worked and that companies or consumers would use.

  Unfortunately, this business-building process is about to get a whole lot tougher. As you leave the go-to-product phase, you are at the mercy of the unforgiving market—potential consumers or customers—as you attempt to efficiently and cost-effectively make those businesses and consumers aware of your offerings and persuade them to purchase your product or service.

  The market will either judge your product and business model worthy or it will relegate it to the startup scrap heap. This is capitalism at its most brutal—and best.

  The clock is now ticking mercilessly. After you declare MVP, savvy investors expect to see healthy growth metrics—downloads, conversion rates, usage rates, and revenues—that suit your business, and no amount of hand waving on your part will save you. A fancy slideshow or prototype describing “how great it will be” will no longer cut it. You will be evaluated on hard, empirical metrics, notably how quickly and efficiently you can generate awareness and interest, thereby acquiring users of your product.

  From Ideation to IPR to MVP, a lot of your attention was focused on Product Architecture. Now the constraint on your growth shifts from the product process to Revenue Architecture and executing the plans you developed as an outcome of your market-engineering process. Now you must concentrate on, and invest in, programs that generate market awareness and demand for your product—scaling the company and identifying and resolving all the attendant issues. And you don’t have much time to do it.

  You must begin the extremely challenging process of expanding your team beyond just people with specific product skills. Now you need to add team members with a mix of revenue and system architecture skills. But only a few; true scaling of your revenue engine must wait until you actually reach the MVR value inflection point.

  Further, you must find people with a combination of strategy and execution skills—a rare breed. And you can’t afford to hire the wrong people, because mis-hires at this stage cost time, a resource that is in short supply.

  No wonder this phase is so challenging.

  This is also the point in your company’s life cycle when a few members of your team, possibly some of your closest friends and those who began with the company, may not be well-suited to continue. These partings are sometimes neither voluntary nor happy. The worst can end friendships and even lead to litigation.

  “Most of our mistakes were within the Team Architecture. The team you start with will not be the team you need to grow with, and that team will not be the team you need to scale.”

  KATHRYN PETRALIA, Cofounder & President, Kabbage

  Most early-stage startup CEOs and their teams have experience building products, either through school or prior work engagements. Unfortunately, I have found that most do not have the equivalent experience in building a category, architecting a team skilled across all functions, or developing Revenue Architecture. In other words, you will be leaving your safe zone to operate in a foreign environment with few guideposts.

  Startup Failure Rate

  FIGURE 24

  We are mindful of the 80 percent failure rate for startups, and we don’t want you to fail. This chapter is devoted to helping you avoid the many pitfalls of this stage of your business’s journey.

  As I mentioned, Product Architecture was the key Traction Gap Framework pillar in the prior stages. Now, as you move from MVP to MVR, the other three pillars begin to play a more prominent role. So I am going to focus on them in this chapter to help guide you through this stage—from MVP to MVR. I’ll begin with Team Architecture.

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  TEAM ARCHITECTURE

  “Coming together is a beginning. Keeping together is progress. Working together is success.”

  HENRY FORD, Founder, Ford Motor Company

  The universal feedback from every CEO interview I have ever conducted is that Team is by far the most important of the four Traction Gap Architecture Pillars.

  That makes sense. Startups, after all, are composed of human beings who must work together to accomplish a goal. Anything that gets in the way of that process compromises the mission, and at this stage—where time is short—compromises can be lethal.

  We humans are complicated creatures. We each come with our own set of values, talents, and “baggage.” Those attributes make us unique—and perhaps brilliant at what we do—but, at the same time, they can make us difficult to work with.

  Therefore, especially in these early stages of a company’s history, it is up to the CEO to identify people with the skills required to specify, build, and deliver a great product to market—and with the right personality to work well with the other team members.

  Unfortunately, some people with the most gifted product talents do not make great team members. Or, as the company grows, those with otherwise remarkable individual skills are not capable of scaling with the company, nor do they necessarily want to move from an individual contribution role to that of a leader of people and teams.

  The 50 or so CEOs and founders we interviewed for this book all provided similar advice: “Hire slowly, fire fast.” It’s hard, but if the people you started with aren’t cutting it, you must transition them out of the company or move them into roles better suited for their skill sets.

  You may ask “How do I find the right people with the right skills, personality, and the ability to scale?” I don’t have a ready answer to that, but I can give you a process you can use to avoid mis-hires in whom you select to bring onto the team.

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  ORGANIZING FOR SUCCESS

  Here are some hard lessons I’ve learned in my 25+ years working on the operating side of startups and corporate life, combined with my experience working with early and mid-stage companies as an investor.

  Direct Reports—The people the CEO appoints as direct reports signal to customers, employees, business partners, and investors what matters to the CEO and what he or she believes is critical to the company’s success. So choose your direct reports carefully, as you are telling a lot of people what is important to you.

  Decision Making—Adding layers of management between the CEO and the people who are executing the business model can slow down decision making and reduce the speed of decision execution. I have found that lackluster or tardy execution can kill a startup. CEOs are usually CEOs because they have excellent intuition and the ability to analyze data and make good decisions quickly. Thus, relying upon others to “interpret” data, market signals, and employee issues may actually slow that interpretation and introduce suboptimal decision making. The best startup organization is usu
ally the flattest one.

  Visibility—The CEO must have fast and accurate visibility into what is going on in his or her business. Therefore, the CEO should have the people responsible for executing key elements of the business model installed as direct reports. Here is a list of likely candidates for direct reporting, along with the scope of their responsibilities:

  VP Marketing—responsible for the initial creation of revenue through demand generation (top of the funnel) and “future” revenue (revenue from future sales periods).

  VP Sales—responsible for delivering “in period” revenue—inside and field sales, for example.

  VP Support—responsible for assuring that the product works as marketed/sold.

  VP Service—responsible for implementing a service and support apparatus (if this is a part of your business model).

  VP Products—responsible for capturing and specifying a complete product that meets market demand; includes product marketing and product management.

  VP Engineering—responsible for building and delivering a complete product.

  VP Customer Success—responsible for making sure your customers are happy and using the product every day. One customer success rep for every $1M ARR is generally considered best practice, but this varies based upon the Average Contract Value (ACV) of your product or service.

  VP Finance—among many things, responsible for internal systems, as well as the accounting and collecting of revenue.

  VP HR—responsible for vetting and recruiting key employees along with managing employee benefits, etc. Although HR is a critical function, few startups at this early stage are in a financial position to invest in a fulltime HR professional. At this stage, I recommend using a trusted third party on a contract basis until post MVT.

  VP Alliances/BD—responsible for the interface with many different corporate partners that enables the startup to go to market more effectively and to deliver a complete solution.

  VP Channels—responsible for managing indirect sales (if they are a key part of the company’s business model).

  VP Customer Experience—responsible for capturing and reporting market signals via a variety of channels, including communities, market surveys, etc.

  In my experience, a CEO and/or a GM should be able to handle between 7 and 10 direct reports if each of those reports is an A player and runs his/her organization effectively. This recommendation fits with the findings of anthropologists (and experts on military leadership) that the most effective span of control for leaders is about a half-dozen subordinates.

  At this stage—any stage, really, but especially now—the fewer the layers between the CEO and the front-line team, the better the access and visibility that CEO has to the unvarnished truth of the business. You may not have the financial resources to hire all these functional leads at this stage, but the functions I’ve described must be covered by the people you do have on board.

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  HIRING—THE INTERVIEW PROCESS

  “I am convinced that nothing we do is more important than hiring and developing people. At the end of the day, you bet on people, not on strategies.”

  LARRY BOSSIDY, former CEO, Allied Signal Corporation; Chairman, Honeywell Corporation

  If you sit down with a number of HR executives and ask each of them which questions companies should ask candidates during the interview process to ensure they select the “best fit” person, you will likely hear a wide range of answers, some of them even contradictory.

  Over time, larger companies develop their own processes and techniques (e.g., psychographic testing) to uncover whether or not a candidate will succeed in their organization and integrate into their culture.

  And technology is playing an ever greater role in this process. For example, one new company has emerged—Aingel, spun out of NYU—that is using AI to assess candidates, even entire management teams, based upon their social media posts, LinkedIn profiles, and other digital “exhaust,” to predict their ultimate success. This is public data so no permission is required from the candidates. They don’t even need to know they are being profiled. Aingel uses its machine learning-based algorithms to compare an individual’s traits with others known to be successful in similar roles to determine that candidate’s likelihood of success. And Aingel accomplishes this feat with surprising accuracy.

  Beyond assurances that no employment laws are violated, companies of any size must develop a talent recruitment and hiring process that enables them to quickly and accurately identify which candidates are the most likely to be successful in their organizations.

  The dilemma is that most interviewers are typically asked to reach an accurate judgment of this complexity in just the 60- to 90-minute time span of a typical interview. Making these judgments is truly one of the most difficult tasks in all business. Not surprisingly, industry statistics suggest that many don’t get it right.

  Glassdoor.com commissioned research with Brandon-Hall that discovered that 95 percent of employers surveyed admitted to making hiring mistakes each year. Meanwhile, Dice Inc., a talent company, reports that “a study by the Society for Human Resources Management (SHRM), [determined that a bad hire] could cost up to five times a bad hire’s annual salary.” According to the Harvard Business Review, as much as 80 percent of employee turnover stems from bad hiring decisions.

  The mistakes are hugely costly for larger companies, but devastating for early-stage startups that teeter on the brink of viability from quarter to quarter.

  So what can a startup do to enjoy a relatively straightforward and accurate way of determining whether a candidate will be successful?

  In my experience, you can reliably pursue only two lines of questioning to determine whether someone is the right choice:

  Is the person truly skilled in the function for which he/she is interviewing?

  Will this person fit into the culture of the company?

  Other questions are “nice,” but in my experience they are superfluous to predicting the success of a particular candidate.

  I suggest that you develop a set of questions that will test the candidate for expertise in the slot for which he or she is interviewing, whether in engineering, sales, marketing, finance, etc. Those skills-based questions should be created by your best employees in similar roles, or by people who you consider to be skilled subject-matter experts and willing to advise you. These people should also conduct that portion of the interview; after all, only they are qualified to ask those skills-based questions and ascertain the accuracy of the answers.

  For example, if you are trying to fill a technical role, the candidate should be required to perform a “code test.” If the role is in product marketing, the candidate should be required to write a positioning document.

  Beyond being competent in his or her field, in order for a candidate to remain with the company as a long-term employee, he/she also must fit in culturally and adopt and adhere to your Core Values. More about Core Values, which are important, is covered in the next section of this chapter.

  For example, if the team believes coming in early and working late is a Core Value, then the interviewers should ask whether the candidate is willing to do this. The candidate’s attitude needn’t be completely congruent with the company’s culture, but it should be very close. The candidate also should meet with a number of members of the group, and company, to test for personality fit, as opposed to job competence (the candidate should have already passed the latter by this point).

  Assuming the candidate successfully crosses this hurdle, the company should then conduct follow-on reference checks that are designed to substantiate or refute the competence claims of the candidate.

  Three of those checks should be references the candidate provides. Another three should be conducted with people not on the candidate’s reference list, but suggested by the references provided by the candidate.

  No reference can tell you whether the candidate will be a cultural
fit; only the members of the hiring company can get a feel for this, because only they know the culture of their company.

  “Attracting quality engineering talent when we were competing against prominent Silicon Valley companies was difficult. While we could have gone the route of lower-cost engineering, quality engineer talent was critical. We ended up targeting geographies/countries that we were familiar with outside the Valley and building out the engineering team where they could be the core engineering team, just in a remote location.”

  AMY PRESSMAN, Cofounder, Medallia

  The company should also include at least two people in the interview process who are not there acting as official interviewers. Instead, they are there to sell the candidate on why that person should join the company. These people might be senior executives, board members, or other company employees (typically industry veterans, though you might mix in newly hired contemporaries of the candidate), who are good at face-to-face communications.

  I don’t believe this approach is a perfect solution, but if you follow its simple process, I believe it will help you to reduce the percentage of your “bad” hires.

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  WHO SHOULD NOT INTERVIEW CANDIDATES

  If you have not personally held the role for which you are interviewing a candidate—at the stage the startup is currently operating—do the company a favor and be a “cheerleader” only. Do not pretend to be a role-based interviewer.

  Instead, recruit two or three people who have successfully held those positions at the stage the company is in, and have them perform a skills-based interview to determine if the candidate’s skills are sufficient.

  When you or other members of your startup’s management team meet with the candidate, you all should evaluate the candidate for cultural fit, not job competence.