March 13, 2017
PUBLISHED BY Bruce Cleveland
I have been fortunate to have been either an operating executive or investor in some very transformational software companies in Silicon Valley, joining or investing at a time when they were just very early-stage, private companies. These include C3 IoT, Marketo, Oracle and Siebel Systems, to name a few.
Working with, and learning from, some of the most successful tech executives and teams in the world has shaped my personal view of what is required to take a startup from ideation to global market leader. And, since becoming involved in venture investing a decade ago, I’ve enjoyed sharing the strategies and tactics companies have used to achieve success.
Unfortunately, industry statistics from a variety of sources show that more than 80% of startups fail. As early stage investors, my venture firm (Wildcat Venture Partners) established and sponsored the Traction Gap Institute to perform research to see if we could isolate the factors that lead to startup success or failure.
Last week, the Traction Gap Institute held an event in San Francisco, where it shared its initial insights from interviews with 17 CEOs whose startups successfully started and scaled. From those interviews, The TGI was able to conclude, overwhelmingly, that the leading cause of success, and failure, was team related.
But, before we jump into the results, the following is a brief overview of the Traction Gap ™ Framework and why Wildcat Venture Partners created it. This should help explain the terminology and the approach the TGI uses.
Traction Gap Framework
Let’s look at how our industry invests today. To begin, everyone in the startup ecosystem – LPs, VCs and entrepreneurs – refers to companies by their latest financing round (e.g. Seed, Series A, Series B, Series C) as though a financing round correlates with a company’s level of maturity and future risk. Here is why this doesn’t work.
Financing rounds are moments in time when companies are valued. But those moments, in and of themselves, are seldom associated with actual value inflection points. For example, a company building a complex product, such as a database, may raise multiple rounds and take a few years before reaching a Minimum Viable Product (MVP) whereas a mobile app company may only require a few hundred thousand dollars and six months before reaching MVP.
Does this mean the database company is failing because it required multiple rounds of capital to reach MVP? No, of course not. It may ultimately fail if once it reaches MVP it can’t scale but the fact a database company needs multiple financing rounds before it sells a single version of its product doesn’t mean it is failing.
We need a better yardstick to determine and assess startup risk — and momentum.
The fact is that startups reach actual value inflection points at various moments when they are able to demonstrate they have reduced overall company and investor risk. They accomplish this by achieving a certain revenue run rate or product usage rate, and can accurately predict customer acquisition costs and prospect conversion rates.
The unvarnished truth is that a company’s financing rounds are a terrible proxy for the company’s maturity level or future risk.
To identify and quantify a startup’s actual risk reduction moments, Wildcat Venture Partners developed the Traction Gap Framework.
This prescriptive operating and investment framework is designed to help companies move through the critical time between the Initial Product Release (IPR) and Minimum Viable Traction (MVT), which is a point in time when the company has demonstrated significant revenue growth, usage rates or a combination of the two. Reaching MVT typically occurs about the time when a “tier 1” venture firm will actively contact the company to discuss why they are best to lead the next financing.
As a startup moves from one value inflection point to the next, it must continue to develop and evolve core competencies across each Traction Gap architectural pillar: Product, Revenue, Team and Systems. This is explained in the Traction Gap Framework paper you can download from here.
There is enormous financial risk to all companies entering, or moving through, the Traction Gap. If they fail to reach the next Traction Gap value inflection point – on the capital invested from the prior round – they are highly unlikely to secure additional funding and survive. Industry statistics show that more than 80 percent of startups – recent data suggests even more – fail to successfully traverse the Traction Gap.
Wildcat Venture Partners created the Traction Gap Institute in order to sponsor research to publicize tried, tested and proven strategies and tactics startups can use to successfully traverse the Traction Gap. We see the Traction Gap Framework as an ever-evolving approach that can be further improved by encouraging all entrepreneurs – not just the ones we invest in – to share their insights and experiences.
This brings me to key learnings the TGI unveiled last week at an event co-sponsored by Shasta Ventures, Velocity Group and Wildcat.
Velocity, acting as a research partner for the TGI, interviewed 17 founders/CEOs of B2B companies including Marketo, Blue Martini, CouchBase, CollabNet, Egnyte, and many others. The interviews focused on the CEOs and their journeys from IPR to MVT, specifically looking at the four architectural pillars of the Traction Gap:revenue, product, team and systems.
Given the startup community’s fascination with product and issues surrounding MVP, you might have expected these CEOs 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 we 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 1, 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 smoothly moving through the Traction Gap. Former Marketo chairman and CEO Phil Fernandez, who is now a venture partner at Shasta Ventures, was the featured speaker at TGI event last week.
I’ve worked with Marketo and Phil since October 2006 – more than a decade – and can attest to the team and culture he built from the earliest days. As Phil pointed out last week, people are either rowing with you or rowing against you, so it’s important to hire fast, and just as quickly cut ties with individuals who may be trying to go against the tide. Even an “A Player” can be toxic to a company’s culture and mission.
He also noted that founders are responsible for building culture from day 1. While Marketo didn’t create a formal written playbook describing its culture, the company was built on a strong belief system that focused on diversity, gender equality and a passion for customers.
The survey data also showed that focusing on team issues too late slowed down progress for 18 percent of the companies. In hindsight, those companies realized they needed to act faster to make corrections if their hires didn’t fit the company culture. Phil shared 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 Phil’s biggest disappointments were the couple of times he had to tell an executive they weren’t the right person for that stage of the company. Phil knew that the team is what’s important in the end, and that meant doing what was right for the company.
This experience was echoed in the responses heard again and again from companies interviewed by the TGI. 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 want 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.
- For Marketo, customers were key. While there were many naysayers about Marketo initially, Phil 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 sometimes meant slowing down on sales to focus on teaching existing customers how to use and get the most out of the product.
- 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.
- Phil explained how Marketo developed a strong feedback loop between its customers and the sales group. This close relationship resulted in a core group of loyal users – known as the Marketo Nation – 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 from Phil to the executives in the room: 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.
- 80 percent 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, rather than expanding to a broader customer base in the early stages. Another important success factor was developing a clear financial and pricing model early on.
- Phil noted that 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, Phil said, was working closely with his head of sales, who each month walked into his office and said, “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. “It’s a lot like compound interest,” Phil added. “It got a little bit bigger and a little bit better each month.”
These findings are monumental. Think about it: 80 percent of startups had a clear plan for profit, revenue and growth by the MVR stage. If a company is focused entirely on product and not revenue, the path through the Traction Gap could be elusive, if not impossible. Likewise, if a company is solely focused on revenue, but not people, they could miss the boat.
Tell Us Your Story
If your company successfully traversed the Traction Gap, was your team key to that success? If not, what was? We’re interested in capturing your input and sharing the results on the obstacles you overcame and what enabled you to traverse the Traction Gap. Please share your thoughts below.
We are hoping to involve as many entrepreneurs in our research as possible. If you would like to get involved, visit www.tractiongap.com and join the TGI.
TGI membership is free, and it will give you a voice in Traction Gap research, as well as access to data and future invitations to events and workshops, such as the one held last week, and where you can learn more about the strategies and tactics for traversing the Traction Gap. Please come to our events and share your experiences.