■
STRIVING FOR MARKETING/PRODUCT FIT
An important comment about MVR here for B2B startups. Although revenue is certainly an important metric, so is the number of customers/users you’ve acquired. Investors want to see “repeatability,” and that means obtaining a good number of logos (customers) or users who are deriving value from your product. So, if you have a complex enterprise application with an ACV of $500K, then four customers—or less—might generate $2M ARR. That isn’t MVR. Investors will likely want to see that you have at least 20 customers, maybe more, before feeling confident that there is a “real” market and giving you credit for reaching MVR.
No matter what market you serve or your business model, after you reach MVP the pressure is now on to grow. In spite of all that pressure, now is not the time to add significant marketing and sales resources and begin outbound advertising and other marketing campaigns.
Why? Because while you may have established market/product fit at this point, you do not yet have marketing/product fit.
“Startups are inherently chaotic. The rapid shift in the business model is what differentiates a startup from an established company. Pivots are the essence of entrepreneurship and the key to startup success. If you can’t pivot or pivot quickly, chances are you will fail.”
STEVE BLANK, Adjunct Professor, Stanford University; author, The Startup Owner’s Manual
What Steve Blank’s comment means is that while you may have a market-first offering determined by statistically valid market research, and while you also may have confidence in the product you’ve built from your Beta program feedback, you still as yet do not have valid proof that you have the right value propositions and processes to convert awareness and interest from the market into actual revenue.
In fact, you will only know you have marketing/product fit once you have complete confidence that you understand the entire buyer’s journey, that is, how to engage companies/users, create interest, and convert that interest into revenue. And that you are increasingly able to predict how long that journey will take and what percentage of the time a prospect will become first a customer and then a repeat user.
Until you know for certain you have marketing/product fit, you must limit your investment in your revenue engine: marketing and sales teams coupled with brand and demand-generation programs.
During this precarious stage, the members of your management team must serve as a proxy for the company’s revenue engine. They must go on sales calls or engage with businesses or consumers. They must listen and learn from user engagements and develop a sense of what to say, what to demonstrate, and what must be done consistently to get a sale over the line.
Then the management team needs to document the process and the content using messaging frameworks, scripted demos, videos, sales training and enablement tools, white papers, etc., so they can use them in corporate marketing and sales programs.
If your average contract value is $60K, then you will need 33 companies to reach $2M ARR and the MVR value inflection point. My point here is that you do not need a big sales or marketing team to accomplish this objective.
The key takeaway I want to emphasize is that during the MVP-to-MVR stage, the startup’s management team should by and large “own sales and marketing.” This is the only way to ensure that teams across your startup are learning what it will really take to begin to scale.
If you scale marketing and sales immediately after MVP, you will create two problems. First, you will have put layers (people) between yourself and the market. Doing so costs valuable capital.
Second, you will introduce filtering. In the absence of tried, tested, and proven value propositions and sales processes, the people you’ve brought in to marketing and sales roles will simply invent those propositions. They will experiment and then provide you with their filtered point of view with respect to what is and isn’t working.
You do not want to do this. If you do, you are putting the fate of your startup into the hands of people who most likely do not have as much experience as the management team. And they may not have the ability to accurately tell you what is and isn’t working during the buying process.
Meanwhile, as you are running these unstructured experiments, you will continue to burn valuable capital without making significant progress toward your one-year, $1M ARR goal and, subsequently, $2M ARR, which is the approximate revenue you should have achieved at the MVR value inflection point.
You may find yourself with dwindling capital at the worst possible time. You may not be able to go back to your original investors and say “We need more capital to figure out why we aren’t seeing any traction yet.” If they are early-stage investors, they may be relying on you to prove traction so your next group of investors—those who want and need to see real market metrics, not a PowerPoint slide show—can make an investment decision. But . . . you don’t have those metrics for those investors—or those metrics are questionable—because you don’t have traction! You are now trapped in the very definition of a “vicious cycle.”
This “vicious cycle” is the trap into which a sizable percentage of startups fall. And they did it to themselves, because they mistook MVP as the time when they needed to lock in that revenue engine.
Don’t do it. Save that step for when you reach MVR.
During the interviews for this book, we discovered several valuable lessons that startups would be wise to consider as they move from MVP to MVR:
While there were many naysayers about Marketo initially, Phil Fernandez, founder and CEO, said the company was able to rise above the skepticism by working with a core group of customers to build a product they wanted. This method of working sometimes meant slowing down on sales to focus on teaching existing customers how to use and get the most out of the product.
Marketo developed five years of revenue projections at the start, and while it didn’t always go as planned, the company hit its numbers every single quarter. A key to that was working closely with the head of sales, who each month was asked “What is our goal for next month?” By doing that month after month and quarter after quarter, Marketo was able to stay on the right path.
Eighty percent of the CEOs we interviewed had a clear plan for profit, revenue, and growth by the Minimum Viable Repeatability (MVR) stage. Executives said they worked closely with the first few customers to ensure their success with the product before expanding to a broader customer base in the early stages. Another important success factor was developing a clear financial and pricing model early on.
These findings are monumental. Think about it: 80 percent of successful startup teams had a clear plan for profit, revenue, and growth by the MVR stage. If a startup is focused entirely on product and not on revenue, the path through the Traction Gap could be elusive, if not impossible.
■
SYSTEMS ARCHITECTURE
When you are initially advancing from MVP to MVR, you do not need many more systems beyond the ones you set up at the beginning of your startup. And most of those should be primarily back office-oriented for the finance (e.g., payroll, A/P, A/R), engineering, and product teams.
However, as you move further away from MVP and closer to MVR, you will need to investigate specific front-office marketing and sales technologies that you will want to use to power your business model from MVR to MVT.
At that point, the typical challenge becomes selecting from the more than 7,000 marketing and sales technologies available in the marketplace. It can be an overwhelming, paralyzing experience.
I suggest keeping the process as simple as possible and using industry-leading software, for no other reason than when you hire marketing and sales personnel, they are likely to know how to set up, run, and maintain your selected applications.
The tools/applications you use also will be determined by the go-to-market business model you choose. If you have products that target B2B and use a direct sales model, those factors will dictate t
he use of one set of tools; if you use an e-commerce model, you will have to use a different set.
I really liked what one of our portfolio companies did when it finalized its “RevTech” (i.e., marketing tech + sales tech) stack. It has a high ACV, nearly $400K, and primarily uses a direct sales model. So the tools its management selected were chosen to specifically fit that purpose.
More important than the specific tools they chose, I liked the way they showed the board the tools they use for demand generation that differ from sales pipeline development.
I recommend that your go-to-market team pursue a similar strategy and develop a “lead to cash” RevTech Systems Architecture that fits the demands and enables the growth of your business.
■ Tools by Sales Stage and Use1 ■
■
CAPITAL, PERFORMANCE METRICS,
AND FALSE POSITIVES
I began this chapter by saying that getting from MVP to MVR will be your toughest challenge. By now, you probably agree.
During this time, not only will you need to demonstrate that you can grow your business, but you may also be faced with having to raise your next round of capital, especially if you didn’t plan your prior raise carefully.
As I said in the Introduction, more than anything, the Traction Gap Framework is a way for you to understand how to plan for and engineer your financing.
In particular, you should attempt to raise sufficient capital to get from just before MVP all the way to MVR. To do that, you will need proof that you were able both to build a product and then carry it through a Beta program, demonstrating that you can build your product and get customers to use it, repeatedly. And you’ve developed all the metrics to show a prospective early-stage investor.
The MVP-to-MVR stage will be the last time you can raise capital without having to show growth data: new customers, users, usage rates, etc. This also is the last time that you will still be mostly a slide deck company as opposed to a spreadsheet company; as the latter, investors will demand that you show them your month-over-month growth rates, churn, downloads, DAU rates, CAC, CAC ratios, and the like.
You will need to engineer your financing round coming off of IPR and just before declaring MVP, and you will require enough capital so that you are confident you can make it all the way to MVR, and slightly beyond.
How much capital is “enough” capital? You need to reach at least $2M ending ARR. If you use the calculations I showed you in Chapter 2, you’ll need at least $4M to do that, more likely $5M to $6M.
Warning: if you fail to make it to MVR on this capital, you will find raising new capital to be exceedingly difficult, perhaps impossible. So don’t worry about giving up too much ownership in your company at this stage; give up enough to get to MVR, because getting there is all that matters right now. After you reach MVR, you will find it a lot easier to raise capital at higher valuations that are less dilutive to your ownership in your startup.
I want to caution you from declaring MVR too early. You can be fooled into believing it’s time to move to the next phase by a “false positive,” revenue growth, that is, using revenue growth as the sole metric to base your decision to begin the scaling process—adding significant marketing and sales resources—to get to Minimum Viable Traction.
Mark Organ is the founder and CEO of Influitive and former founder and CEO of Eloqua. He is an experienced, successful entrepreneur.
Here is his story about prematurely scaling Influitive:
“We grew from $1M to $4M to $8M ARR so it looked solid but there were actually some things we didn’t figure out. Some of the traction was an illusion, fueled by curious marketers who wanted to give our ideas a try but weren’t truly committed to them.
“Now after a lot of hard work we have figured it out, dramatically improved churn while cutting burn by 70%, and are growing again.
“Unfortunately, our premature scaling has cost us valuable time and money, and possibly ownership as well if we raise another round.
“We still have a good shot at building a big category again, like marketing automation. We could have had less risk and dilution if we’d had a more accurate mental model for what was really happening with our customer installations. If we were being truly honest with ourselves, we would have admitted that for some of our customer segments and use cases, the required level of engagement and value was insufficient for us to push the pedal to the metal.
“Another nuance here that may be specific for category creators is that the first MVP is really not enough to achieve category dominance—or even viability.
“This was true at Eloqua and at Influitive as well. Eloqua didn’t really take off until we created the automation layer, more than 4 years after founding, which allowed multiple marketing functions to migrate onto it from other platforms.
“At Influitive, our first product is pretty good but I think what will make us go supernova is the beefing up of our community functionality, which will allow multiple functions in marketing and customer success to migrate onto it from other platforms, like Marketo for example.”
One of the ways you can avoid false positives and mistakenly declare MVR (even MVT) too early is by closely monitoring your usage ratios (DAU/MAU or WAU/MAU) for each customer.
Poor usage ratios indicate that your product hasn’t yet crossed over from “nice to have” to “must have.” Ignore these warning signs at your peril; you will be sorely surprised by excessive churn rates later on, even though you experienced early wins. You must ruthlessly focus on your usage ratios, which is how your customers/users will tell you that you are really ready for scaling.
To make this last point abundantly clear, listen to Mark Organ:
“We didn’t start tracking WAU/MAU for both advocate and admin users until our churn started to get into uncomfortable territory. And when it did, instead of pulling back on the burn, we kept it high and assumed we would figure it out like we always had before, in a few months. It took us a couple of years to figure it out and we burned too much cash.”
You must avoid being part of the 80 percent to 90+ percent failure rate. You must reach the next value inflection point, Minimum Viable Traction, on this capital, and you have little more than a year to do it. And that is the topic of the next chapter.
The following table provides a set of key B2B and B2C metrics that you should target and attain by the time you reach the MVR value inflection point:
■ Key Minimum Viable Repeatability Target Metrics ■
B2B
B2C
Stage Duration
1.5 years
1–1.5 years
Revenue
$2M ARR
N/A
Downloads
N/A
Depends
DAU/MAU
25%
25% Minimum
Churn
< 10% (Enterprise)
< 30% (SMB)
< 30%
CAC Ratio
< 2.0
< 1.0
CLTV
>= 3x
>= 3x
Key Takeaways
Minimum Viable Repeatability is the smallest level of repeatability a startup can execute to demonstrate the feasibility of its business model, market/product fit, and marketing/product fit. MVR is one of the most challenging value inflection points for most startups to achieve.
At MVR, a startup has demonstrated that it has some understanding of “how” and “why” customers are acquired. It now knows a significant amount about its target market, has semi-effective product positioning, has developed a reasonable sales pitch, and enjoys a handle on the primary sales objections and rational responses to them. It also has a few reference customers. And it should be generating about $2M ARR.
Before moving on to the MVT, you should have reached the following Traction Gap architecture milestones.
Revenue—At MVR, a company has established processes and patterns that suggest it has a viable business model. It understands how much capital is required to acquire customers/users and the amount of investment required to retain them. By this time, the company should have captured and documented its Customer Acquisition Costs (CAC), CAC ratios, Customer Lifetime Value (CLTV), marketing and sales waterfalls with conversion rates that lead to revenue, and Customer Retention Costs (CRC) and CRC ratios. In addition, the company must have gathered enough statistical evidence to show that if it invests a certain amount of capital on sales and marketing, it can reliably convert those investments into recognized revenue.
Team—It is at MVR, and only at MVR, that a company should begin to invest substantially in marketing and sales personnel and programs. Every member of the company should be trained and certified on the startup’s messaging matrix, so that everyone correctly positions the company and its offerings via corporate presentations and demonstrations.
Traversing the Traction Gap Page 18
