Minimum Viable Product (MVP): The product has achieved minimal customer validation metrics and product/market fit. Marc Andreessen defines product/market fit as follows: “Product/market fit means being in a good market with a product that can satisfy that market.”4 MVP is a debated term, but at Wildcat we subscribe to the following definition: Minimum Viable Product is the most pared-down version of a product that will be purchased or used by customers. And, as you will read, we believe that MVP goes beyond basic product-engineering: it must also include market-engineering elements.
Minimum Viable Repeatability (MVR): My Wildcat partner Bryan Stolle identified and named this critical value inflection point. At MVR, you should have a solution-grade product, business model, and repeatable sales/marketing. We define MVR as the smallest amount of repeatability a startup can execute to demonstrate its business-model feasibility and product/market fit. MVR is a critical value inflection point for most startups. At MVR, the startup has demonstrated that it has some understanding as to “how” and “why” customers and users are acquired. It now knows a significant amount about its target market, has semi-effective product positioning, a reasonable sales pitch, a handle on the primary sales objections, and rational responses to them. It also has a few reference customers. The startup is now safe to hire a small number of salespeople, can invest in marketing and lead generation, and can expect them to be fairly effective. That said, repeatability is not just about sales. The startup should have also demonstrated product-release repeatability, implementation-success repeatability (real customers or consumers using the product and getting real value), and some marketing and lead generation repeatability.
Minimum Viable Traction (MVT): MVR + multiple quarters of growth. MVT is a point in time when many—if not most—of the mid- to late-stage venture firms will begin to aggressively reach out to find out more about your startup and compete to invest in it. To reach the point of Minimum Viable Traction (MVT), startups must build upon the lessons they learned reaching MVR. They now must scale successively quarter over quarter for the next 12 to 18 months. Reaching MVT signals the company’s exit from the Traction Gap and entry into the go-to-scale phase.
These milestones represent critical moments in time for a startup. As you will see, in the fast-moving world of business in the 21st century, there is only a brief amount of time to go from one Traction Gap value inflection point to the next. I spend a significant amount of time in the beginning of this book explaining each Traction Gap value inflection point and its importance, so that we are speaking the same language before we get there.
Ultimately, startups must raise enough capital to ensure that they do not fall short of reaching the next Traction Gap value inflection point using the capital raised in the prior round. Otherwise, they will face significant challenges or even potential dissolution.
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The Four Core Architectural Pillars
So far, we’ve looked only at the milestones in the early-stage development of a new startup (or corporate new-product initiative). But, in fact, it is not a monolithic enterprise that marches down this path. Rather, as this chart shows, it is the four core architectures of an enterprise—product, revenue, team, and systems—that must successfully complete this journey, including traversing the Traction Gap.
Architectural Pillars
FIGURE 5
All startups—at all stages—must develop competencies in these four architectures, then continue to measure, refine, and optimize each of them along the entire path to MVT and beyond.
I want to make a critical point here: that for each Traction Gap milestone, you must satisfy the revenue, product, team, and systems requirements associated with that specific milestone before you begin moving to the next. Failure to do so can, and often does, lead to excessive delays and use of capital, thereby significantly compromising your ability to reach the next value inflection point with the amount of capital you have in the bank. And failure to reach that next value inflection point on your current capital can substantially compromise your ability to raise any future capital. Better to take a little extra time to make sure you are ready—across all four architectures—before taking off to the next value inflection point.
Let’s look at each of these architectures in turn:
Product Architecture
A startup’s Product Architecture includes the set of technologies, applications, and features that comprise its offerings. A well thought-out Product Architecture enables a startup to achieve rapid product/market fit through customer validation, as well as to sign on the partners needed to complete the whole product offering.
Sometimes, in spite of early product acceptance, a team may discover that it needs to pivot its product, change positioning, or add significant capabilities in order to secure sustainable fit in a viable market category. This pivot is neither rare nor a sign of failure—some great companies started out intending to be entirely different enterprises.
For example, Slack began its life as a company called Tiny Speck. It built a massive multiplayer online game called Glitch. After nearly four years from its founding, it threw in the towel on Glitch for a variety of business and technical reasons.
But Tiny Speck, in order to provide its team with better internal communications, had created a collaboration application built on top of Internet Relay Chat (IRC) technology. Using the application, their team could easily post, view, and respond to content and conversations exchanged over a variety of channels.
The team decided this collaboration application worked so well for themselves that they should bring it to market. They began working in earnest to do this in November 2012 and, based on user downloads and usage, they won the support of their investors and persuaded them to stick with this “pivot.”
Tiny Speck launched Slack—which stands for Searchable Log of All Communication and Knowledge—to a small number of companies in May 2013. In August 2013, the company opened access up to a wider audience. Within 24 hours, Slack signed up 8,000 companies, and the total increased to 15,000 companies in two weeks. Slack officially launched in February 2014, and the company was renamed Slack Technologies in August 2014.
As of the writing of this book, Slack was valued at more than $7B. Nice pivot, Slack team!
In such cases, early-stage investors must be prepared to provide more time and capital if they believe significant value creation is likely. Startup teams must ensure that true customer validation has been achieved to avoid premature expansion and the accompanying dangerous waste of capital. Instead, they must have the patience to postpone expensive go-to-market scaling until such a fit has been confirmed.
Of the four elements critical to MVR, the Product Architecture is where early-stage startups tend to have the most well-developed plans and expertise. That’s not surprising, given that most of these entrepreneurs start a company in the first place to pursue a product idea.
Revenue Architecture
A startup’s Revenue Architecture is defined by its business model and its ability to monetize awareness, engagement, and sustained usage. When a startup reaches a Minimum Viable Product (MVP), it has validated a set of value propositions, but it will likely still be experimenting with business models and processes that convert awareness and interest into revenue.
For B2C (or B2B2C) startups, this process normally translates into testing techniques that:
Optimize Lifetime Value (LTV) to Customer Acquisition Cost (CAC) ratios (including organic as well as paid acquisition);
Create efficient supply-side acquisition in the case of marketplaces;
Experiment with margin on transaction fees, subscriptions, etc., building toward positive unit economics and contribution margins;
Increase engagement of Monthly Active Users (MAU) and Daily Active Users (DAU); and
Build repeatable and scalable geographic or market segment roll-out strategies for multiple consumer marketplaces and services.
For B2B, Revenue Architecture involves strategies to:
Lower Customer Acquisition Costs (CAC);
Identify up-sell opportunities;
Increase usage rates; and
Optimize Top of the Funnel (TOTF), Middle of the Funnel (MOTF), and Bottom of the Funnel (BOTF) conversion rates.
B2B Funnel
FIGURE 6
Whatever the product and business model, entrepreneurs must build critical momentum. That’s because a deficiency in Revenue Architecture poses the greatest near-term risk of failure. It is this momentum that enables startups to exit from the Traction Gap with sustained, significant growth and usage rates that exceed the competition and your target expectations.
As I mentioned previously, despite the desire of most startups to begin scaling prior to reaching MVR, such a tactic can be disastrous both for the startup and its investors, consuming a significant amount of capital with little growth to show for it. This premature scaling can result in a material down-round, layoffs, significant employee ownership dilution, and even shutdown due to lack of investor interest. This is why entrepreneurs must carefully evaluate and objectively decide when their startup has truly reached its MVR.
Between MVR and MVT, the challenge for entrepreneurs is to determine when, where, and how to optimally scale: should they look at new geographies, move into new industries, or a new market segment (e.g., from small to medium businesses into large enterprises)?
Team Architecture
Early-stage startups often have small product-oriented teams, and have not yet hired a complete management team or other personnel needed to scale the company. Competition for A-level employees is fierce, further impeding a startup’s ability to scale. Many times, the wrong people are hired for the wrong role, or early team members are unable to scale with the startup. Other times, the founding team may pull together a good core management team, but then lack a comprehensive strategy to address the extended team of the board of directors, customer advisory board, products council, employee advisory group, etc.
Getting the Team Architecture right is key to reaching MVR on the path to MVT. We have seen this play out in startups countless times. Entrepreneurs must learn how to systematically build up their teams and dramatically reduce the team dynamic risk.
Experienced investors know that one of the biggest risks leading to startup failure is associated with dysfunctional teams. For example, these teams might include people who were great contributors early on but fail to scale or, under increasing pressure, become toxic to other team members. The more you can fill out your management team and the longer you work together, the less risk there is in the eyes of the investment community.
I want to spend some time on the topic of team here, because team is the number one issue of concern cited by every CEO and founder we interviewed via the Traction Gap Institute.
The Traction Gap Institute (TGI)—www.tractiongap.com—was founded by Wildcat Venture Partners to help entrepreneurs traverse the Traction Gap. Anyone can become a member, at no cost. One of the benefits of the TGI is the networking events where we interview successful founders, hear from industry experts, and explore topics and issues related to product, revenue, team, and systems.
One of the TGI’s partners is Velocity, a research and consulting firm located in Silicon Valley. Velocity worked with the TGI and our Wildcat team to interview founders/CEOs of technology companies such as CouchBase, Egnyte, Eloqua, Marketo, Medallia, ServiceMax, Veeva, and many others.
The interviews focused on the founding CEOs and executives and their journeys from Initial Product Release to Minimum Viable Traction, specifically looking at the four Architecture Pillars of the Traction Gap.
Given the startup community’s fascination with product and issues surrounding Minimum Viable Product, you might have expected these CEOs and/or founders to say that product is everything. If so, you would be wrong. The fact is, you can’t win with product unless you are supported by good people, a clear customer focus, and a path to profit, revenue, and growth.
Overwhelmingly, the entrepreneurs interviewed said that having the right team and culture in place played a bigger role in their company’s success. Velocity found that 82 percent of those surveyed started building their culture on day one, looking for individuals who were willing to make similar sacrifices, had a strong work ethic and an intellectual curiosity, shared the same values, and were top-performing “A players.”
This was definitely the case for Marketo, a poster child for making it through the Traction Gap. I was fortunate to be a first investor in Marketo, a board member of the company from inception through IPO, and had the opportunity to work with Marketo chairman, CEO, and founder Phil Fernandez.
I can attest to the team and focus on culture that Phil placed from the earliest days.
In our interviews with Phil and other successful startup teams, most told us they believed that the founders are the ones responsible for building culture from day 1. While I don’t recall whether Marketo had a formal written playbook describing its culture, I do recall that the Marketo management team had a strong belief system that focused on diversity, gender equality, and a passion for customers.
The Velocity survey data showed that focusing on team issues too late slowed down progress for 18 percent of the companies. In hindsight, those companies realized that they needed to act faster to make corrections if their hires didn’t fit the company culture.
In our interviews, one executive commented that there’s no “perfect team,” and changing requirements in a fast-growing company may make it difficult for some individuals to keep up. He explained that in one case he hired, then fired, his first head of sales within that person’s first six weeks on the job, as soon as he realized the fit wasn’t right.
Some of the biggest disappointments were the times a CEO had to tell an executive that they weren’t the right person for that stage of the company. Knowing that the team is what’s important in the end, meant doing what was right for the company.
This experience was echoed in the responses heard again and again from the CEOs we interviewed. In fact, one executive surveyed admitted that waiting too long to get rid of a “toxic” person cost the company 18 months in delays. That’s right, he thought they could have reached Minimum Viable Traction—the monumental stage when a company is ready to scale and has traversed the Traction Gap—18 months earlier had they quickly eliminated just one employee.
Other interesting takeaways from the TGI research included:
75 percent of the successful companies cultivated a customer-centric culture, which entailed learning what customers wanted before building any product. Executives said discovering customers’ pain points is key because they will be willing to pay for you to ease that pain. In the next chapter, I’m going to show you why being customer-centric alone is insufficient to succeed.
60 percent focused on building a sales-oriented culture in the early stages. That culture must embrace experimentation and continuous improvement, so the company can deliver a product that customers are ready to pay for, even before the official launch.
One executive explained how they developed a strong feedback loop between their customers and the sales group. This close relationship resulted in a core group of loyal users who were instrumental in evangelizing the company’s solution and building a paid user base. This circle of friends grew to include others not connected to the company, such as analysts and press. A piece of advice we were given from one executive: conduct yourself in a way where people want you to be successful . . . and remember, you don’t have to win every battle to win the war.
Systems Architecture
The systems and processes of a startup can either help it accelerate growth or hold it back. A successful Systems Architecture must integrate front and back offices, establish transparent performance metrics, and cultivate the progressive cultures needed to succeed.
When we invest in early-stag
e startups, many of them are using a rudimentary CRM implementation for sales and support, a basic development system, perhaps a simple e-commerce platform for the web, and most typically outsource their back-office functions such as payroll. Once we invest, we ask them to architect—not necessarily yet implement—back and front office systems and processes they will require for the kind of growth they will ultimately need to support.
By the time they reach Minimum Viable Traction, startups should be using relatively sophisticated platforms with refined business processes.
In addition to operational systems, startups must ensure that they have a well-designed development stack: the suite of applications that a startup uses to manage its development process. We have found that the type of engineering management infrastructure a startup elects to use can negatively impact margins and prevent the company from scaling later on. This upgrading process must be thoughtful and systematic, with one eye on the future.
Having worked with so many high-growth technology startups, we counsel founders and teams to build systems and processes with the right foundation early so that operational efficiency can fuel, as well as keep pace with, growth—while also minimizing the amount of financing required.
Once a startup has demonstrated mastery over these four architecture areas, acquired a meaningful cohort of customers using its now-proven go-to-market strategy, and executed four or more quarters of successive growth, it is prepared to declare MVT.
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HOW TO USE THE TRACTION GAP FRAMEWORK
The Traction Gap stretches from a startup’s Initial Product Release—typically a year or so into its existence—to Minimum Viable Traction, which can occur as much as three years later, when it has achieved a certain level of revenue growth, engagement, downloads, or usage. These variables signify market validation and positive growth.
In other words, the Traction Gap is the all-important 36-month span that determines whether the company will thrive or die.
Traversing the Traction Gap Page 3