Traversing the Traction Gap

by Bruce Cleveland

  “Hiring people is an art, not a science, and resumes can’t tell you whether someone will fit into a company’s culture.”

  HOWARD SHULTZ, Executive Chairman, Starbucks

  Any board members/investors involved in the hiring process should express to the candidate the reasons they made the investment in the company and why they are excited about its prospects.

  Too many times I have seen startup executives and venture investors allow their egos to get in the way and want to “interview” candidates for positions they have never personally held. That is almost always a mistake. If you aren’t a skilled auto mechanic, would you work on your own car? Wouldn’t you prefer that professionals perform the task on your behalf?

  So please recruit a “skilled mechanic”—someone with the specific skills for the roles you need filled—to do the interviewing. Otherwise, don’t be surprised if you have an employment misfire. And remember, prior to MVR, mis-hires can be fatal.

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  CORE VALUES

  “The CEO is not in charge of the company. The values are. If, at the end of our careers, we have not passed along positive values, we have abdicated our leadership role to build organizations that thrive.”

  DAVE LOGAN, author, Tribal Leadership: Leveraging Natural Groups to Build a Thriving Organization

  I mentioned “Core Values”; now let’s look at this concept more closely.

  Core Values are specifically and inextricably tied to the culture of the company. And culture, like a product, is not something that should be built ad hoc. Its features must be chiseled in from the beginning.

  Whether or not he or she likes it, the CEO is also the “Chief Culture Officer.” The culture of any organization always starts at—and if poorly designed and implemented, rots from—the top.

  It has become popular for startups to create Core Value statements, typically something that’s rolled out in the form of a nicely printed document that employees are expected to pin to their cubicle walls and pay fealty to an obligatory slide presented at company All Hands meetings.

  It’s not that these statements are all bad; in fact, your Core Values should be written down and shared with everyone in the company. It is only when stated Core Values deviate from reality—the day-to-day actions performed by the CEO, executives, and managers—that employees begin to seriously question the integrity of the company. Hypocrisy is not conducive to employee morale. And, in today’s world of social media, this discord can easily and quickly show up in public forums, such as Glassdoor.com, as anonymous posts reviling the company and management. This discord can make it challenging to hire top talent as they perform their own due diligence on the startup and its practices.

  The key to success with Core Values that work to create a great culture is to ensure that the values are developed jointly with members of the rank and file, as well as with the management team. If these values are ever violated, the CEO and management team must take swift and decisive action to demonstrate that they support the Core Values with more than lip service.

  Finally, a good statement of Core Values needs to be sufficiently precise and concrete and regularly evaluated against the real behavior of the company. A nebulous statement—Google’s “Do No Evil”—is open to an almost infinite number of interpretations and can come back to bite you. And a statement that is lofty but essentially meaningless—“We cherish our customers”—might as well never be written at all.

  Siebel Systems produced a Core Values book that was the output of the Siebel Founder’s Circle (a group of people Tom Siebel hand-picked representing all levels and functions of the company). “Professionalism” was one of the Core Values described in the book. All Siebel employees who were customer-facing or in management and executive roles were required to wear suits and ties, even engineers. No eating was allowed at your desk—to encourage employees to talk to each other at lunch, etc. Every Siebel employee knew that professionalism was one of the Siebel Core Values and what it meant; they lived these Core Values every day.

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  THE STARTUP GOVERNANCE PROCESS

  When you are an early-stage startup, every waking hour is an opportunity to move your company forward. Devoting anything that isn’t related to product or market momentum is wasted effort.

  Naturally, the last thing startup teams want to do is invest time and energy into superfluous meetings, especially when those meetings are not directly related to building or selling the product.

  Many startups use collaboration technologies, such as Slack, Confluence, and Google Docs, as a way to keep people informed on project status. These technologies enable the team to dispense with too many wasteful meetings. That’s great. However, now that you are beyond MVP, you are likely to begin bringing on people not directly involved in day-to-day product decisions. These folks are likely to work in finance, marketing, and sales. They are often also relatively recent additions, who do not yet have the benefit of knowing the company decision-making process or who to go to, to get things done.

  While collaboration software is useful to communicate among functional team members, it is insufficient to effectively communicate all that is happening across the company. For now, at least, virtual communication isn’t able to adequately articulate the “nuances” that people must hear directly by interacting face to face with each other.

  To avoid communication issues, I suggest that startups consider holding at least two regular meetings. These are, first, the weekly executive staff meeting; and, second, the executive quarterly planning meeting followed quickly by an All Hands meeting, referred to earlier, that communicates the objectives and decisions made during the executive quarterly planning meeting.

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  THE WEEKLY EXECUTIVE STAFF MEETING

  I joined Siebel Systems as a member of the executive team when the company was a small startup, with just a few million in revenues and fewer than fifty employees. I held a variety of roles in the company that ranged from the head of marketing, to the head of alliances, to running the company’s “on demand” division (its SaaS products). Ultimately, I ran the product division, where I was responsible for defining and delivering all the products in the company catalog. So I personally went through many stages of growth in a variety of different positions.

  From that experience, I came to believe that the weekly executive staff meeting process enabled Siebel to manage its phenomenal growth, from a handful to 8,000 employees and $2 billion in revenues in just five years. The weekly executive staff meeting played a key role in ensuring effective communication and collaboration across our team and company.

  That is also why I recommend that the executive staff meeting should be a mandatory, standing meeting held by the CEO every week at the same time. The time that seems to work best for most startups is from 10 a.m. to noon on Mondays. This is before the work week kicks off in earnest—and it’s late enough that most of the executive team members can attend either physically or virtually. This timing is especially true for the engineering lead, whose team always seems to want to start late and work late. That said, you can of course set up this meeting to be any time that works best; as long as it is held every week, at the same time, everyone knows it is mandatory, and it takes precedence over anything and everything else. No exceptions.

  In the early stages of your startup, most of the agenda will be driven by engineering and product management issues. But, by MVP, other issues (e.g., sales, marketing, and HR) will begin to surface and should be placed on the agenda.

  Over the twelve years that Siebel Systems was an independent entity (until it was purchased by Oracle in late 2005), the executive staff meeting format never much varied. Each week, Tom’s direct reports provided a summary of:

  What our functions and teams accomplished in the prior week,

  What we expected to accomplish in the coming week,

  Any key issues we needed to share and solicit input on or that required a decision
by Tom or others on the executive staff.

  Also, at these meetings, the head of Sales provided an update on the sales forecast for the quarter, using a “worst, expect, best” format.

  Worst—if everything fell apart

  Expect—the most likely case

  Best—if everything came together

  We called this sales forecast the “WEB report,” and it was shared with everyone on the team. Why? Because each of us, typically, had something to do with getting a new customer over the line.

  As Siebel became larger, each of Tom’s direct reports would hold their own staff meeting immediately after Tom’s exec staff meeting. This way, we could quickly convey important information to our direct reports. They, in turn, would hold a staff meeting with their direct reports.

  In this way, critical information, vital to the company’s scaling, was easily and quickly conveyed every week—human to human, throughout the company—even when, in time, we had thousands of employees scattered around the globe.

  Today, even with significant advances in collaboration technology, nothing can replace human-to-human, two-way, real-time communication and interaction to ensure that information is accurately exchanged.

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  THE EXECUTIVE QUARTERLY PLANNING MEETING

  “You have a meeting to make a decision, not to decide on the question.”

  BILL GATES, Cofounder, Microsoft

  At this stage, your startup is rapidly going through many changes. You are adding new people, new users, and new processes. You are quickly learning from market and user feedback what is and what isn’t working regarding your product. You also are discovering how effective you are at reaching out and persuading companies and new users to try your product or service. And, not least, you are learning what they like and don’t like once they do.

  Due to this rapid change, whatever annual plan, processes, or Management by Objectives (MBOs)—Google uses the term Objectives and Key Results (OKRs)—you set at the beginning of the year are likely to be obsolete by mid-year, perhaps even sooner.

  Setting annual goals and metrics is fine, and this should be done. But I have found that startups also need to constantly be on the lookout for emerging constraints on growth, identify their root causes, and remove them.

  I recommend using a quarterly planning offsite meeting that begins on a Friday afternoon and runs through Sunday—so it provides less interference with the work week—as a way to address constraints on growth.

  Each member of the senior executive team should come prepared to discuss the quarterly objectives their organization accomplished, objectives that were unfulfilled, and their plans and targets for the subsequent quarter.

  At these meetings, the CEO should kick off the discussion by summarizing the last quarter’s accomplishments and introducing whatever issues are gating the company’s ability to grow. These issues can and do vary widely. For example, one quarter the snag may be product issues, the next it may be hiring, demand generation, or competition. The entire management team should engage, determine, and activate solutions to solve those problems. The offsite should not end until each identified problem has been assigned a specific owner, key measurable objectives have been set, and a due date is assigned for its resolution.

  By having someone who represents each business function in the room at the same time, everyone hears the problems and is on board with the decisions made to solve them by the time the team leaves for home on Sunday afternoon.

  The CEO should then report the outcome of the planning offsite to all employees the following week, in an All Hands meeting. This procedure keeps everyone in the company up to speed with the overall status of the business and key issues that management is focused on solving, and ensures that everyone knows the CEO’s priorities for the upcoming quarter.

  With the right team and processes in place, we will now turn our attention to the next Traction Gap architectural pillar: Revenue. Your ability to quickly develop your Revenue Architecture is fundamental to your success. Scaling can’t begin in earnest unless and until you complete this foundational work.

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  REVENUE ARCHITECTURE

  “Our goal is long-term growth in revenue and absolute profit . . . so we invest aggressively in future innovation while tightly managing our short-term costs.”

  LARRY PAGE, Cofounder, Google

  As noted, once you declare MVP, you are formally on the hook to start growing your customer or user base. And investors will expect you to grow at least as fast as comparable startups using a similar business model.

  If you are a SaaS company, for example, once you reach MVP you must grow your revenue at least to $1M (ending ARR) within one year and add another $1M ARR (a total of $2M ending ARR) in the following six months to reach MVR. These aren’t my metrics, they are the metrics B2B companies such as Salesforce, Marketo, Workday, and many other successful SaaS companies achieved when they were at this stage of growth.

  Startup Life Cycle Timeline

  FIGURE 25

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  B2C STARTUPS

  If you are a B2C startup, you differ slightly from your B2B brethren, in that reaching MVR is not typically linked to revenue. Instead, investors will judge your success on other factors such as downloads, daily active usage rates, and churn.

  After interviewing many successful B2C investors, we were surprised to learn that most don’t use hard-and-fast metrics to determine MVR, the earliest point in time where good venture investors are willing to make a serious investment in a B2C startup.

  Instead, these investors rely on a number of factors, including the velocity of growth (such as month-over-month percentage increases in downloads), decreasing user acquisition costs and churn rates, strong virality coefficients, significant daily active usage rates, and DAU/MAU ratios.

  Since most B2C startups use a revenue model supported by advertising or data monetization, the size of the overall user base and the frequency at which the application or marketplace is accessed determine its ultimate value. So it makes sense that investors look for similar metrics that advertisers will value.

  We asked Sean Ellis, CEO of Growthhacker.com, about B2C customer acquisition. Sean advises that it’s all about identifying the optimal channel to reach and convert users:

  “For me, the most important growth channel tends to be organic growth—and it needs to be fed by the channels that you can invest into. So, the first thing that I’m really doing is just making sure that I can take someone from consideration to activation inside the product.”

  To substantially improve customer acquisition and conversion rates, Sean suggests, start by buying keywords related to your offerings. At this point, you aren’t really trying to do demand generation. He describes this initial process as “harvesting”—significant testing of landing pages and keywords—to see what works in getting people to sign up—register—and use your product.

  The next challenge is to ensure that they aren’t just registering, that they actually use the product. With one of the companies he worked with, Sean was able to get a lot of registrations through the channels he selected, but “the majority of them, or 90 percent of them, were not using the products. Never used them, not even once.”

  This finding was a company-threatening issue. Sean admitted that his “comfort zone” is channel building. But he knew that if he didn’t resolve this conversion issue, the company would have even bigger problems downstream. He took his findings to the CEO and explained the issue, that 90 percent or more of the people who registered to use the product never used it. He suggested that the management team needed to switch strategies from pure acquisition to focusing on activation: getting people to use the product. But this would require some product changes, specifically during the onboarding process. Based on the data, the CEO agreed.

  This change in strategy meant the company had to put the current product roadmap on hold while everyone then focused on solv
ing the issue of how to effectively onboard initial customers. The results? After four months of performing numerous experiments and iterations, they were able to get about a 10x improvement in the signup-to-actual-usage rate. After that, they went back and tested the channels where they had been struggling with registration-to-activation conversions. To their relief, those channels now scaled.

  During our team’s interview with Sean, we wanted to find out some of the specific tactics he’d used to drive these highly improved conversion rates. He said that they went to the worst-performing channels, the ones with a 90 percent dropoff after the signup stage. They inserted A/B testing at this point, with different offers, etc. But that didn’t really change the dropoff rates. They didn’t find out until they decided to ask the consumers who made it through this step why they’d signed up but hadn’t downloaded the product; they had captured the user’s email address during the registration process so they could send a follow-up email to ask this question. The reason for the dropoff, they discovered, was that consumers were skeptical whether or not the product was really free. With that information in hand, they were able to resolve the problem.

  Sean commented on this finding:

  “So, we changed the onboarding to give them a choice, download the free version or download the paid version. We put a big graphical check mark in the free version so it wasn’t like we were trying to push them to download the paid version, but because they saw that a paid version existed, suddenly the free was more credible and so we got about a 300 percent improvement in downloads just from that one experiment.”

  Intrigued by these techniques, my team asked Sean if he’d be willing to share some other techniques he used to improve purchase conversion rates. Here is one example:

  “One experiment was when they signed up for the free product we actually gave them, we’d give them a message that said for the first 30 days you get full premium functionality and it will automatically change to the free version after those 30 days. Then they would discover one premium feature during the 30-day trial that they really liked and that was enough to double the upgrade rate.”