February 28, 2018

PUBLISHED BY Waverly Deutsch

SOURCE Chicago Booth Review

How to get a company off the ground

The Traction Gap is defining the second stage of new-venture creation

In his 2011 book, The Lean Startup, entrepreneur Eric Ries outlined a process for creating a new venture. His wasn’t the first methodology ever published, but it caught fire and became a worldwide movement. Ries’s book, with its vocabulary of experimentation, minimum viable product (MVP), and pivots, defined something that entrepreneurship educators, practitioners, and investors were trying to codify: what makes a successful start-up. Ries was joined by his former investor and University of California at Berkeley professor Steve Blank, creator of the customer-development methodology defined in another book, The Four Steps to the Epiphany. Blank engaged with Swiss academic Alex Osterwalder, whose Business Model Canvas template offered entrepreneurs a way of thinking beyond just the launch of their product into the operations of a company that could bring the product to market. The Lean Startup movement continued to pull in thought leaders in areas of user experience and start-up finance. Now it is a full curriculum taught all over the world by consultants, colleges, entrepreneurship incubators, and even government agencies.

Creating a company is like getting a jet airplane off the ground. The start-up phase so clearly articulated by Lean Startup is merely the plane’s systems check and taxi out of the gate. As the plane begins to accelerate down the runway, it must build enough traction and momentum to overcome gravity and lift off from the earth. Only then can it speed toward the sky. The same is true for young companies.

VC company Wildcat Venture Partners, started in 2015 by successful investors and entrepreneurs, is defining that next stage of company building—the sprint down the runway—the way Ries and Blank defined the start-up stage. They call it the Traction Gap. Their methodology provides a framework and set of metrics entrepreneurs can use to determine whether they are ready and eligible for venture funding, which would allow them to successfully hit the accelerator and enter a period of high growth. What is unique and especially useful about the Traction Gap model is that, like Lean Startup, it is prescriptive—it gives entrepreneurs detailed specifics about what to prioritize, where to apply resources, and what metrics to look at to determine success. It is also data driven.

Googling “entrepreneurial success metrics” produces more than 1.5 million results, with articles such as “7 Metrics All Entrepreneurs Must Track” and infographics offering “34 Startup Metrics that Tech Entrepreneurs Need to Know.” Clicking into these myriad references yields metrics that include burn rate, recurring monthly revenue, lifetime customer value, customer acquisition cost, churn, virality, and net promoter score. What doesn’t show up is meaningful information that tells entrepreneurs what these metrics should look like at any particular point in their business development. Part of the problem is that each business’s path will be different, and there is no exact number for any one of the metrics that guarantees success or indicates certain failure. Additionally, the metrics and timing for reaching certain milestones will change based on the business model the company is pursuing.

For a business-to-business software-as-a-service (B2B SaaS) company, monthly recurring revenue is a key indicator early on. These are companies such as Salesforce, Slack, or Zendesk—B2B companies that run software from the cloud rather than from their own internal servers. However, for a social network or mobile app company, virality—how often your customers recruit new users for you, effectively reducing the cost of customer acquisition of those new users to zero—will be critical.

With the Traction Gap framework, Wildcat is seeking to provide entrepreneurs with a playbook for executing in the post–start-up, early-growth phase, as well as data from successful companies on what metrics indicate you have reached critical inflection points.

Defining the go-to-market phase

Wildcat’s founding team of Bruce Cleveland, Bill Ericson, Bryan Stolle, and Katherine Barr came together not just with extensive expertise in venture investment but—more importantly, according to Cleveland—with operating experience. Cleveland himself was an early employee at Oracle and on the founding team of Siebel Systems. Stolle created and built Agile Software. Collectively, the team has invested in dozens of companies that have been acquired or had IPOs, including Marketo, Rocket Fuel, Coupa, and Workday.

As a new venture firm, Wildcat wanted a strong investment thesis and a process for working with early-stage companies that would differentiate it from all the other seed and Series A investors. It also wanted to provide its limited partners—the people and organizations Wildcat gets its funding from—best-in-class returns. During their positioning brainstorming, Cleveland introduced an idea he had been working on at his prior firm. He called it the Traction Gap. The Wildcat team jumped on the concept and worked to fully develop it into a complete framework.

Cleveland describes a problem Wildcat was having: it was meeting tons of founders who were great product people and seeing 40-page slide decks in which 38 slides were devoted to product architecture, technology stacks, and total market size. Slide 39 would show the classic hockey-stick sales curve leading to tens if not hundreds of millions in anticipated revenue, and Slide 40 would be the ask—for $4 million, $5 million, or $7 million to get the team to the promised land. Cleveland would ask them: “What is this miracle that occurs between product launch and $100 million in revenue?” He discovered that while all teams had spent considerable time on their product, few had invested significant time developing detailed plans regarding the customer-acquisition process, marketing tactics, and sales cycles and metrics.

That’s when Wildcat decided to codify the go-to-market phase of company development. If Lean Startup represents the go-to-product stage, and Geoffrey Moore’s 1991 book Crossing the Chasm is the roadmap for becoming a really big company (or the go-to-scale phase of development), what was missing was a methodology for the go-to-market period—building traction with early customers and developing a repeatable revenue-generation process that leads to profitability.

Read the full article on Chicago Booth Review here.