Traversing the Traction Gap

by Bruce Cleveland

Action items assigned

  Goals agreed to

  Next board meeting time & place (of course, a calendar invite should be sent, as well)

  Ask what went well and what didn’t. This is a request, according to our research, that VERY few founders do well.

  SUMMARY

  At the end of the day, your relationship with your board will depend much more on how you manage the members than on how you allow yourself to be managed. Smoothly run board meetings show professionalism and inspire confidence. Sharing what’s hard, as well as the workload, allows board members to feel like they are “in the tent.” Trying to prove your competence or shielding the board from what’s actually going on inside the company will only weaken your relationship with them.

  8

  BEYOND THE TRACTION GAP

  You’ve made it successfully to Minimum Viable Traction!

  You have now accomplished more than 80 percent, perhaps 90 percent, of all entrepreneurs. The number is likely even greater than that: it’s hard to put an exact number on survivors of the passage from Ideation to MVT because many startups simply come and go without leaving a trace. That means that you are, indeed, part of a very elite group. Take a moment to celebrate.

  That’s the good news. Now, I’m afraid that you still have a very long journey in front of you, if you intend to remain a viable, independent entity. But, if you followed the steps I’ve outlined in the previous chapters, you will be far better prepared than most.

  You are now soundly in the go-to-scale phase.

  Fortunately, the best practices you’ve implemented to date should have prepared you well for this phase. They include:

  A market-first product, product process, and market-centric team,

  A culture of high performance, accountability, collaboration, and transparency,

  A management team with deep functional skills and the ability—and processes—to recruit and hire the best talent,

  A governance process designed to quickly make data-driven decisions and to effectively communicate those decisions to every employee, and

  A suite of state-of-the-art back-office and front-office systems that enable cost-effective conversion of awareness and interest into revenue.

  At Minimum Viable Traction, you should be at about $6M of Annual Recurring Revenue, or $500K Monthly Recurring Revenue. According to the T2D3 revenue growth model presented in Chapter 7, you now will need to prepare your company to triple, to $18M, over the next year; and then, after that, double year-over-year for the next three years.

  To accomplish this goal, you will almost certainly need a fresh round of capital, your third round after your initial seed investment (if you had one). You still will need to calculate how much capital you require to reach that next financial milestone. For that calculation, you should refer back to the end of Chapter 2, where I showed you how much other startups, on average, have raised by the time they reach MVT, at what pre-money valuation, and with what amount of dilution. The amount of capital you will need to reach the next revenue objectives will largely be determined by your Customer Acquisition Cost ratio (CAC ratio); a measure of the effectiveness and efficiency of your growth engine—your marketing and sales organizations; and your churn rates managed by your customer success or customer experience team.

  At this point, you will be dealing with true mid- to late-stage investors, who will dive into your financials assiduously and with great detail. In fact, they will expect your investor deck, after explaining what problem you solve—your Minimum Viable Category—to begin with the financials/metrics, not a product overview. And they will expect to know all the metrics of your business cold, including:

  Customer Acquisition Costs (CAC),

  CAC Ratio,

  Customer Lifetime Value (CLTV),

  Churn Rates,

  Daily Active Usage Rates,

  Gross Margins,

  Cost of Sales, and

  Average Sales Cycles.

  They will not be patient with, or forgiving of, your ignorance.

  You should have enough customer and user data on hand that venture investors will now “add value” by telling you how great or lousy you are doing compared to similar companies both in your industry and out of it. You are truly a spreadsheet company, and from now on you will be evaluated by investors on your metrics. So get used to it . . . and good at it.

  Ironically, as far as you have come over the past few years, you are still a very young company with a long way to go before you generate some sort of liquidity for yourself, your employees, and your investors through an IPO or M&A event. In fact, it could be another 3 to 4 years before that happens, if it happens at all. This period is no time to rest on your laurels.

  A quick story to highlight the unpredictable challenges post MVT.

  By 2010, Marketo was firing on all cylinders, four years after its founding. The company was growing rapidly. In fact, Marketo had finished the year at about $14M, up substantially from the prior year. Now, three years after MVP, the company was consistently at or above the T2D3 revenue growth curve.

  Although Marketo initially targeted the SMB market, three years after founding the company, marketing teams at some large enterprises had begun to take notice of Marketo and dangled some tantalizingly large deals in front of the company.

  The problem? Marketo needed to have some “enterprise-y” capabilities—such as 24/7, follow the sun, global support—if it wanted to engage those enterprise customers. The company didn’t have any such programs in place. Indeed, it still needed to commit to building them. Meanwhile, it was becoming increasingly apparent that Marketo needed to include large customers if it was going to continue to maintain its rapid growth.

  Ultimately, Phil, the company—and the board—decided it wanted—needed—those deals. So Marketo bit the bullet and added an enterprise team, even though everyone knew it was going to be expensive and difficult. The result? In 2011, Marketo closed about $32M in revenue. So, in retrospect, it was a brilliant and decisive move; but, if you had spoken with the Marketo management team at the time, I suspect they would have told you that adding that enterprise team was extraordinarily difficult.

  If you are growing your company correctly, you too will likely face a company-betting moment one to two years after reaching MVT. To keep on the high-growth path, you may be compelled to make one or more existential decisions:

  Open up a new geography.

  Move into a new vertical.

  Add a new product offering.

  Acquire a company in a new market space.

  Acquire a competitor in your current market space.

  Move into a different market segment.

  There will be few people by your side—especially ones you trust—to help you make these life-and-death startup decisions. You will “run the numbers” obsessively . . . and you will wake up sweating in the middle of the night with the realization of just how narrow that ledge is that you are walking on. One misstep and you could cripple your company’s growth—and all that effort over the years up to this point will have been for nothing.

  At this stage, your board most likely consists solely of venture investors, most of whom are smart but may not have ever personally built a large and successful company from scratch. And, if they are less experienced GPs, their investment track record and tenure with their partnership may depend solely on the successful outcome of your startup. You may not realize it, but they may be just as nervous as you—maybe more so—because they are not really in a position to help you. They have no control over what is happening in the company, and their career with their venture firm and in the venture industry is inextricably tied to you.

  Some of your venture investors may have some prior operating experience, but few of them will have started or started with a company as an operating executive from its inception and taken it to a large exit. These board members don’t possess the operational expertise or
experience to help you make key operational decisions based on their personal experience in a similar situation.

  This is when having a great board of advisers becomes critically useful.

  As startups enter the go-to-scale phase, I highly advise them to bring on two to four advisers; strong, veteran operating execs who’ve gained wisdom from having been down this path before, know the pitfalls that lie ahead, and can help address many of the questions and issues that you will face. Compensate your advisers with a stock option grant. Advisors for startups at this stage typically receive 0.1 percent to 0.25 percent stock option grants that vest over four years. However, I suggest you limit the time period to just one year to ensure that your advisors are adding value to you and the board.

  Therefore, provide them with a stock option grant that ranges between 0.0025 percent and 0.0625 percent of the company, vesting monthly; this amount is just 0.1 percent to 0.25 percent divided by four. By doing this, each year you can decide whether you want to extend the agreement with a specific adviser for another year. If an adviser isn’t adding significant value, don’t be afraid to replace him or her quickly with others who can. You will not regret investing in this resource.

  And remember: no one has traveled the exact path you are creating. Each day, you will be faced with new challenges for which there are no definitive answers—you are living in a bespoke environment.

  “It’s all about finding and hiring people smarter than you. Getting them to join your business. And giving them good work. Then getting out of their way. And trusting them. You have to get out of the way so YOU can focus on the bigger vision. That’s important. And here’s the main thing . . . you must make them see their work as a MISSION.”

  SIR RICHARD BRANSON, Founder, Virgin Group

  The best you can hope to do is to surround yourself with top talent, best processes, and wise advisers—and keep an open mind to new ideas. If you’ve made it this far, you’re doing a lot of things right, so have some confidence. Don’t become arrogant with success: that attitude has killed many startups. As you grow, each new phase will introduce a new set of challenges that you may not be as well equipped to address. So, find and listen to those with experience for the wisdom of their experience, all while leveraging the processes and skills you’ve honed during the Traction Gap.

  We’ve now covered a lot of ground:

  I started out by introducing you to the Traction Gap Framework and its principles.

  I showed you the key Traction Gap architectural pillars you should be concerned with during each phase of the Traction Gap Framework, and that different pillars must take prominence as you move from one Traction Gap value inflection point to the next.

  I emphasized that without a focus on market-engineering leading to a clear vision and mission statement that defines your category and company, you are ill-prepared to move forward into the go-to-market phase, the domain of the Traction Gap and the cause of the 80%+ failure rate in new startups.

  I explained that developing and defining the category in which you intend to compete to reach Minimum Viable Category is mission-critical and that not nearly enough startups understand or are focused on category creation.

  The “messaging matrix” I provide shows you how to document, store, and share your startup’s positioning, messaging, competitive responses, value propositions, etc.

  I suggested that from the inception of your startup, you must become a market-first company, ruthlessly focused on identifying, capturing, and acting on valid market signals. And that you must include into your decision set for new products and features more than just a handful of friends, families, and companies you know personally.

  And I’ve counseled you that you should never begin to move to the next value inflection point until you are confident that you have satisfied all the product, revenue, team, and systems requirements associated with the current value inflection point.

  Though we’ve looked at a wider space, the true Traction Gap period is from Initial Product Release to Minimum Viable Traction and is primarily concerned with go-to-market issues. That is, I have shown you how you should think about bringing your product to market, rising above the market noise, and preparing your startup to become a category king in the go-to-scale phase.

  During your journey, different Traction Gap architectural pillars tend to come to the fore, depending on the stage, and I’ve pointed them out and discussed them at each stage.

  However, there is one dominant Traction Gap architectural pillar that plays a pivotal role at every phase from Ideation through MVT and in perpetuity; it is the team. Indeed, every CEO and founder I interviewed for this book said that the team was the most critical factor to success.

  In addition, Professor Shikhar Ghosh from Harvard Business School told me that his research validated that the team is the single biggest factor that either enables scaling or constrains companies from scaling. He said that issues with the team plague companies of all sizes—and further, that many, if not most, of the team members who help you successfully navigate one phase are not necessarily well suited for later phases. Those who cannot make the transition will need to be thanked and rewarded for their significant contributions, transferred to new jobs if possible, and replaced as soon as new talent is recruited and promptly installed.

  This process means that companies must be prepared to identify and manage executives and others into new positions or out of the business as soon as they show the first signs that they are unable to scale beyond their current roles. Companies must also be equally prepared and able to onboard new executives and managers quickly and effectively so they can come up to speed as rapidly as possible. You do not have time for hesitation. You will live or die by the talent and cohesion of your team.

  “Successful teams struggle, fight, and bicker too. The difference between a successful team and a failing team: when these challenges happen, successful teams acknowledge and resolve them quickly because the vision, harmony, consistent production, and success of the team is more important.”

  TY HOWARD, author, Untie the Knots That Tie Up Your Life

  Along the way in this book, I also have provided you with hacks—tips/plays—that you might elect to use, depending on where you are along the Traction Gap Framework.

  A word of caution, though. You may decide to use one of the hacks I describe, which may have worked well for others, and then execute it “perfectly” . . . only to find that you have limited or no success with it. Why?

  The reasons vary. It could be that you’re a different company, operating at a different time from when the companies cited here were startups. Your market might be slightly different. Your product might not be as compelling. The overall culture, including consumer tastes, may have changed. There could be many reasons.

  The point is that the Traction Gap Framework, the Traction Gap metrics, the suggestions I make throughout the book, and even the hacks I’ve provided, are meant to be guidelines for your own journey. Your mileage may and will vary. And I cannot guarantee that if you follow the Traction Gap Framework principles that you will be successful. However, if you do not, I believe that your chances of success will be significantly diminished.

  When my Wildcat partners and I begin work with an early-stage startup that is a new member of our portfolio, we know up front that each one is bespoke, with its own journey in front of it. And, that journey is seldom consistently “up and to the right.” More often than not, there are fits and starts, regressions and setbacks, before things begin to work.

  Because of that, we don’t supply rote answers to address their issues. Instead, we look at what they are doing and use the Traction Gap Framework to help develop an operating plan and provide a “North Star” that is directionally accurate. But the specific route we take with each company to get to MVT and beyond is as yet unknown, and will depend on changing circumstances.

  One of the reasons we are willing to share the information
in this book—and not hide it away as the proprietary intellectual property of Wildcat Venture Partners—is that we know the Traction Gap Framework offers guardrails and mile markers, but that most startups will still need additional help to ensure that they arrive safely at their destination. At Wildcat, our track records as entrepreneurs, operating executives, consultants, and investors suggest that we are pretty good helpers! You, too, should find helpers, investors, and advisers who have “been there, done that.” Someone—or a group of someones—who you trust and can help you make it through this challenging phase.

  So, you might wonder how we—Wildcat—apply these Traction Gap principles and operationalize the Traction Gap Framework with our portfolio companies. The answer is that every early-stage startup that becomes a member of our investment portfolio is eligible to participate in our proprietary Traction Gap Assessment and Diagnostic process.

  We begin by having each member of the startup’s management team take a survey. This survey asks each team member a series of questions designed to determine where each believes the company is positioned along the Traction Gap Framework continuum. This process identifies areas of strength and weakness across product, revenue, team, and systems.

  The results from the survey are then evaluated by Geoffrey Moore, along with the Wildcat general partner who made the investment. The two work together to identify areas of misalignment and gaps. They then discuss their analysis in a follow-on workshop with the management team. This workshop typically results in a Traction Gap Action Plan, with some prescribed “remedial” work for the startup team to undertake with Traction Gap Institute (TGI) partners.

  The TGI partners are typically consulting firms and companies that the TGI has vetted and are willing to provide workshops to help startups remedy issues associated with gaps in product, revenue, team, and systems.