Ep. 60 - Startup Success: Engineering A Market to Traverse the Traction Gap - with Bruce Cleveland
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It takes guts, determination, and a healthy dose of optimism to attempt building a startup of your own. And even with that passion to innovate, inspired by a dedication to change or improve the way we do things, the unfortunate reality is that most startups fail.
So the big question is why? And more importantly, what’s the difference between those that fail and those that succeed? What’s the secret to success?
Bruce Cleveland is a Founding Partner of Wildcat Venture Partners and author of the book Traversing the Traction Gap. What compelled Bruce to write his book was to answer that very question around why the startup failure rate was so high and what entrepreneurs could do about it. He’s seen first-hand what’s required to take an idea from startup to category leader, with over three decades of experience building early and growth-stage companies in Silicon Valley before becoming a venture capitalist. And as an investor, he’s been involved with some exciting companies, including Marketo, C3, and Vlocity.
In this episode, Bruce shares:
Why many startups fail and how “market-engineering” separates the winners from the losers.
What the Traction Gap Framework is and the important milestones and pillars that make up the approach.
The necessity to have a market-first mindset and ways to capture that all-important Market IQ.
From Startups to Scale-Ups & Shifting from Operator to Investor
Bruce has been involved in the startup culture since the start of his career in Silicon Valley. He spent his early years working under Larry Ellison at Oracle, where he helped create the Unix product line division. From there he moved to Apple, where he ran several engineering divisions focused on object technology before being approached by Tom Siebel, (whom he worked for at Oracle) to scale his company.
Siebel Systems, the company that originally engineered a market for customer relationship management, soon became one of the fastest-growing companies in U.S. history — scaling from $4 million in revenue to around $2 billion and 100 employees to 8000+ employees in just five years. During that time, Bruce held a variety of executive roles, including running marketing and leading all products.
Even with all the accomplishments Bruce achieved in the tech startup space, he still had this desire to continually learn and try new things, which ultimately led to another career pivot.
Bruce transitioned into venture capital as he felt it would be interesting to take his product background and put it to work as an investor. He joined InterWest Partners in 2006, where they focused on building and investing in early stage startups with a software-as-a-service business model. And during that time, he was one of the first investors in Marketo, an industry leader in marketing automation, as well as other successful companies.
He eventually made another pivot and, with two other founding partners, started Wildcat Venture Partners in 2015.
Getting to the Why Behind The Startup Failure Rate
Having worked across all stages of a business, coupled with experience as a strategist and operator in various functions, gave Bruce a unique lens from an investor perspective.
And it’s these experiential lessons learned from both successes and failures that helped him develop an inherent understanding of what information was necessary before making important investment decisions. Because many of these early-stage companies have little to no data to guide an investor’s decision-making.
With 10 years in the venture industry, Bruce has met with thousands of companies, all with very smart people and ideas, but a majority of them failed. In fact, the failure rates were incredibly high at 80+% overall, and higher for companies purely focused on B2C.
This compelled Bruce to dive deeper into the Why behind these startling statistics, which was the springboard to developing his book Traversing the Traction Gap.
And through extensive analysis, Bruce learned that the success of a startup was not based on product engineering, but what he calls “market engineering.” These market engineering tasks are crucial to getting through the Go-to-Market phase of a startup — The Traction Gap. “This is the place where many of them die,” Bruce says.
Traversing the Traction Gap: Having a Framework for Success and a Market-First Mindset
There are three phases that every startup must pass through in order to succeed. The go-to-product phase (idea to product), go-to-market phase (product to traction), and the go-to-scale phase (traction to scale).
While there is a lot of helpful information available to guide and support founders in the first and third phases, it’s that middle phase that entrepreneurs desperately need assistance. This is the Traction Gap.
Bruce developed a framework specifically designed to help startups bridge this gap:
Source: Wildcat Venture Partners
The concept of the Traction Gap Framework is about how to take an idea, turn that idea into an offering, take that offering to market, and then ensure it successfully scales.
You can think of it as a methodology to help early-stage companies build a foundation for success. A foundational principle of this framework is the notion of performing “market-engineering” tasks to get to “market-product” fit because, without a market, there is no need for your product.
Surviving the Traction Gap involves thinking about the go-to-market phase in a number of subphases — what Bruce calls “value inflection points” — which represent critical moments in time for a startup.
These five value inflection points are:
Minimum Viable Category (MVC)
Initial Product Release (IPR)
Minimum Viable Product (MVP)
Minimum Viable Repeatability (MVR)
Minimum Viable Traction (MVT)
As a startup successfully reaches each milestone, there is a dramatic increase in the value of the startup as a result of reducing market, technical, execution, and team risk.
During this process, it’s critical to develop your Market IQ, which is the intel and data you gather and analyze, about your market. Being market-first includes developing the market IQ, as well as solving problems, identifying what the real root problem is, and what might be potential solutions.
As Bruce puts it, “Market IQ is this process of becoming intelligent about the market. And a market-first mindset is to have a North Star.”
Structuring Your Startup Against the Four Core Architectural Pillars: Product, Revenue, Teams and Systems
No matter what phase, size, or maturity stage a start-up may be in, there are four core architectural pillars — foundational building blocks of an enterprise — that every startup needs to continuously measure, refine, and optimize.
These pillars are product architecture, revenue architecture, team, and systems architecture and they have different levels of emphasis across these five value inflection points.
The team architecture, in particular, is central to a company’s success. Making sure you have the right players and optimal team dynamics early and throughout every phase of your startup is crucial.
A critical point that Bruce makes in his book is that, for each Traction Gap milestone (e.g. MVC, MVR, or MVT phase), you have to satisfy the revenue, product, team, and system requirements associated with that specific milestone before moving to the next. He writes:
“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 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.”
In summary, the Traction Gap Framework provides target metrics, strategies, and tactics that early-stage startups can use to guide them through the crucial go-to-market phase.
This approach is certainly not exclusive to startups; enterprises can also leverage the Traction Gap Framework to take an idea to market and ensuring it successfully scales.
Bruce’s Career Advice
If you are thinking about becoming an entrepreneur, embed yourself in a company that currently exists that is doing really well. Start with a big company that's successful, and work your way down in your career. So, by the time you're 35-40, you've already got years of experience and have seen what’s worked within winners.
Key Takeaways:
In The Traction Gap, roughly 80% - 85% of startups fail. To traverse The Traction Gap takes engineering a market, which requires you and your team to develop that all-important Market IQ.
You have to achieve market-product fit because without a market, there's no need for your product.
The market engineering concept involves critical skills like category creation/redefinition, thought leadership, storytelling, and messaging/positioning. And it is the job of the team (the CEO, founders, co-founders, other executives in the startup) to do the market engineering work not the role of the marketer or PR person.
A market-first company is, first and foremost, concerned with what the market thinks about the products and services that it is building.
This involves researching, problem solving, and troubleshooting. Not taking the time to understand the root cause of problems leads to product failure.
Within the market-first concept are your customers. So focus on your customers, but you also have to constantly look at all those other companies that have yet to purchase your product.
Market IQ is the process of becoming intelligent about your market.
It requires you to look for signals — data and information that strongly reflect what the market says and does (e.g. who's looking for your product and how they would go about doing that).
Find signals through avenues such as qualitative research, surveys, smoke tests, and customer support data. (Note there are significantly more approaches but this is a short list).
Beware of confirmation bias - you want to reach people who haven’t heard of your product or who don’t use it and understand why.
It’s critical to do thorough research and not rush to do this work based on the fear of competitors getting ahead. This can result in an inaccurate reflection of the market leading to product failure.
Traction Gap Framework - Value Inflection Points
The framework provides a shared language that can help align everyone involved, regardless of what stage they are at in their business. And by having shared language, it gives everyone the ability to communicate much more effectively and efficiently.
The Traction Gap Framework involves more than The Traction Gap alone. It takes into account three fundamental phases: go-to-product, go-to-market, and go-to scale. And within these phases there are five sub-phases called value inflection points that a startup needs to reach in order to dramatically reduce risk and prove that the product that you've brought to market has value:
Minimum Viable Category (MVC) - This is how we identify a new category or an existing category that we want to own. You really need to complete minimum viable category work before you declare MVP. It will make or break your company.
Some key questions to think about are the following:
Are we going to redefine the category and if so, what are we going to redefine it as?
If it's a new category, what's the name of the category? What are the attributes of the category?
Research is a critical part of this phase to help you understand if there really is a market.
Initial Product Release (IPR) - This is the point at which the product (often a Beta version) first becomes available to the public and to the target user(s). At this stage, the team is seeking market and customer validation metrics.
Minimum Viable Product (MVP) - This is the most pared-down version of a product that customers are willing to purchase or use. It marks the first moment at which you have the raw version of what you believe can be a successful product.
One of the only elements that is within your control in this whole process is when you declare MVP. Once you declare MVP, you're on the investor clock.
Minimum Viable Repeatability (MVR) - This is where you’ve built multiple versions of the product, have brought it to market, and sold it multiple times. The business is beginning to prove to be viable.
At this point, you are beginning to get a sense of what the business model may look like (e.g.pricing, amount, sales cycle, response rates, what new features we're going to build).
Further there is repeatability on the sales/marketing front.
Minimum Viable Traction (MVT) - It’s that point in a company’s maturity where they have successfully scaled quarter over quarter. Think of it as MVR+ multiple quarters of growth.
There is also a certain amount of time you have to progress through the Traction Gap period (IPR to MVT), in addition to hitting certain metrics, in order to make investors interested in you.
Overall the timeframe from Initial Product Release (IPR) to Minimum Viable Traction (MVT) is about three years.
From IPR to Minimum Viable Product (MVP) = six months.
From MVP, you have 18 months to reach Minimum Viable Repeatability (MVR) and should be achieving about $2 million of annual recurring revenue (ARR).
From MVR to Minimum Viable Traction which is about 12-18 months later, you need to be at about $6 million of ARR, about $500k of Monthly Recurring Revenue (MRR).
Source: Wildcat Venture Partners
If you're not hitting these numbers, then you're off-model, and being off-model means you may not be able to raise any capital at all — and if you do, it's going to be at diminished valuations.
Traction Gap Framework - Architectural Pillars
There are four architectural pillars as part of the framework that have varying levels of focus from one value inflection point to the next. These are the necessary building blocks of all companies.
Product Architecture
A startup’s product architecture entails the set of technologies, applications, and features that make up its offerings.
This is where early-stage startups tend to have the most detailed plans, given their traditional product engineering focus.
Revenue Architecture
This encompasses several components, including your pricing model, marketing, and sales motions.
You need to have a point of view on how you are going to acquire and retain a customer, the cost to doing so, and what that conversion rate would look like from the top of the funnel all the way down to the bottom.
Team Architecture
Of the four pillars, team architecture is really the one that matters from ideation into perpetuity.
What’s critical to answer is the following:
How are you going to build your team?
Who do we need first? Who do we need second?
Where are they going to be located?
What's the culture of our company going to be from day one
Hire slow and fire fast. If somebody is not working out, make decisions quickly because you’re burning up capital. It's about the success of the startup, not about the success of the individual in that group. So, the longer you wait, the more you jeopardize the success of the startup.
Systems Architecture
Processes and systems of a startup that also involve systems of governance, not just technical systems like Salesforce or Marketo.
Rules must be expressed in written documentation so that new hires will understand “this is actually how we operate as a company."
The startups that are successful establish a culture from day one, and then develop that into a systems of governance.
What’s important to take into account is the following:
How are we going to make decisions in the company?
When are we going to meet? What does the exact team meet?
How do we make decisions?
How do we hire? How do we fire?
Resources:
Follow Bruce on Medium
Learn more about Traversing the Traction Gap
Buy the Book
Wildcat Venture Partners Website
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