Bruce Cleveland: Part 1- Traversing the Traction Gap

Bruce Cleveland, who many readers may remember from his Siebel days is now an investor and has a new book out, Traversing the Traction Gap. I had a long ranging conversation with him about the book and also about trends he sees in today's enterprise software industry. In this part we focus on the book, in Part 2 tomorrow he will discuss partnering and how to go after white spaces in the market.

How did the book come about?

Many people have asked, "How long did it take you to write the book?"  It took about a year of nights and weekends and a bunch of rewrites with others helping along the way. Not writing the book – I did that - but performing the interviews, creating graphics, getting legal sign off to use the quotes we collected, and that type of thing.  I learned it really does take a village to get a book out - at least something that's meaningful. More importantly, it took me 35 years of experience to accumulate the knowledge to write it. It required 10 or 12 years on the venture side and 25 years on the operating side.  

I was fortunate to work for and with some of the most amazing technology CEOs and leaders in the Valley.  Luminaries such as Larry Ellison and Tom Siebel were - and still are - the visionaries who created massive markets and incredibly successful technology companies.  Tom's new company, C3, is doing exceptionally well.  I had the advantage of a ringside seat observing the decisions they made and helping to execute them. Over the course of ten years as a venture investor, I met with and listened to presentations from at least 1,000 teams. I learned from those experiences as well. Finally, for the book, we interviewed dozens of successful founders and CEOs to better understand what led to their success.  So, the Traction Gap Framework is something that I developed but the ideas came from the cumulative knowledge and experience of many smart and talented people. 

Over time, patterns began to emerge as I began to see what tended to cause startup failure: 80% for enterprise or B2B oriented startups. B2C -- 90% to 95% failure rates.  CPG -- 98% failure rates. I realized that there are a lot of great ideas and very talented teams, yet many make mistakes that are avoidable. 

So, I started to unpack all of this.  When I joined two other people to create a new venture firm, Wildcat Venture Partners, I brought those ideas with me based upon the patterns I had observed. The most common cause of failure? Many phenomenal product teams stumble when it comes time to take their products to market. While they may have great product engineering skills, most teams lack “market engineering” skills – a term I came up with to represent category creation/redefinition, thought leadership content, market validation processes, pricing models, etc. I decided to double-click on this. 

All early stage startups – and new products inside an existing company – must go through 3 phases: go-to-product, go-to-market, and go-to-scale. There is a lot of help from angel investors, incubators and accelerators for the go-to-product phase. There is also a lot of help in the go-to-scale phase from groups such as Bain, McKinsey, etc. However, there is very little help for that murky go-to-market period. And, the evidence – 80% failure rates and higher – shows us that this is the most challenging phase for startups.  One of my partners is Geoffrey Moore, author of “Crossing the Chasm”. That book has taught millions of entrepreneurs how to think about markets. 

Most of the groups we invest in come out of great colleges or great companies, be it Salesforce, Google, Facebook, or wherever. There, they have learned how to develop a product. However, many of those groups have never experienced bringing a product to market. And, there has been virtually nothing written with respect to how to do it successfully.  There are no prescriptive guides.  There aren't’ guardrails or guideposts for startup teams to follow. I decided that, based upon my personal operating experience taking an early stage startup from an idea to a billion-dollar outcome and investing in multiple early stage startups that went on to become billion dollar outcomes, that I would share my experience and the experience of others who had succeeded.

The Traction Gap Framework

We don’t need more acronyms introduced into the technology landscape. I decided to adopt Minimum Viable Product – MVP -  a term that Steve Blank, Eric Ries, and Marc Andreessen propagated, and derived the names of the value inflection points for the framework from that term. It may be debatable about what constitutes an MVP, but it's something that people are familiar with.  In my experience, if you can explain new ideas in terms people already understand, then they can quickly pick up on those ideas. 

I adopted the “minimum viable” format and applied it to the value inflection points associated with the framework.  The reason that I call them value inflection points is that as you reach each successive point, your company increases in value because you have diminished risk in the eyes of the investor community. In fact, it’s a step function change in value, not a smooth curve.

The first value inflection point of the Traction Gap Framework is called minimum viable category or MVC.  Creating a category, or redefining an existing category, is critical market engineering work.  You must to this early, while you are in the process of deciding whether the product has a viable market. You need to define/redefine your category because the current “category king” defines the “rules” – the attributes - of the existing category and you will be compared against them. This is not a battle you can win – well, at least not very easily.

The next value inflection point is called initial product release or IPR.  This is the first time that you make your product available publicly.  It can be an alpha or beta version, but it's basically the time at which you first place it in front of people, and they tell you whether it's great or it sucks.  Based upon the feedback during this period, you polish it up and, eventually, you reach what you declare to be a minimum viable product or MVP; something that you can begin to actively market. 

The next value inflection point is minimum viable repeatability or MVR. This is the point where you have successfully built and released multiple versions of the product, hired multiple people, experimented with and hardened pricing models, and are now beginning to build the systems such as sales, marketing and governance processes that you need to scale your company.

Then, finally, if you can scale for 12 to 18 successive months - growing quarter over quarter - you will reach this theoretical point called minimum viable traction or MVT. There are actual metrics associated with each value inflection point, including MVT.  But, to provide you with a visual image; you know you’re at MVT when you travel to “Sand Hill Road in Menlo Park” (Venture Capital Row – although SF has become far more popular for VCs over the past few years), meet with the venture capitalists located there, and they begin to sell you why you should take their $ vs. you selling them.

In addition to the value inflection points, the Traction Gap Framework consists of four architectural pillars: product, revenue, team, and systems.  These pillars are present from the moment of ideation and last in perpetuity, as long as there is a company. 

At the various value inflection points, the Traction Gap Framework architectural pillars take different points of prominence.  In the go-to product phase, product and team take center stage. From MVP to MVR or minimum viable repeatability, revenue architecture comes to the fore. Then, finally, as you reach MVR on your way to minimum viable traction, systems finally become important as you prepare to scale. 

The Traction Gap Framework breaks down this very murky time where there is very little data. It provides startup teams and investors with some guard rails and milestones they can target.

During this time, most startups are what I call “PowerPoint companies” -- they don't have a lot of market or customer data to prove that their products will succeed or feedback regarding what it will take to generate success. The challenge for startups at this stage is to get to a point where they become a “Spreadsheet company”; a company with performance data —metrics - that the team and investors can react against. Most venture firms are not comfortable investing in early stage startups that are still in “PowerPoint” mode.  Some will – like the Pre-Seed/Seed firms. And, even the best-known firms will invest early if they know the CEO and/or have strong conviction about the market opportunity. But, most teams will find that the venture community is hesitant to invest until they see tangible traction. 

Understanding what constitutes traction has been elusive for entrepreneurs because there's typically not a lot of feedback given to them by the venture community. And, most venture investors haven’t personally built a company from startup to scale, so there is little expert counsel they can provide based upon personal experience.  I wanted to expose some of the metrics venture investors associate with traction (e.g., capital raised, net burn rate, revenue growth, and usage rates) and how to achieve them. 

That's the background on the framework, the reason I developed it, the terminology I created, and the overall rationale for it.

How portable is the Traction Gap Framework?

I sat down with Geoffrey Moore and asked him, "When you were thinking about publishing ‘Crossing the Chasm’, were you worried that you didn’t have enough proof of concept?  At the time, your ideas were quite nascent, right?”  Geoff said that he wasn’t really worried about that. Geoff said he published it and subsequently augmented and supplemented his original thoughts as needed. So, that gave me the confidence to put my framework out there.

I use variable names for the value inflection points of the framework so that it can support a variety of different business models.  In fact, I treated very lightly - in this book - the B2C business model.  The reason is that most of the investments I make use a B2B or B2B2C business model. 

But, I gave considerable thought to the framework’s applicability and adaptability to other business models and other industries.  We've now accumulated metrics for B2C and we can swap in those metrics at their appropriate value inflection points.  Over time, I can see us doing something similar by industry verticals.  So far, it seems to hunt well.  I suspect it will readily work with other business models.

And, for the most part, I believe the framework is flexible and adaptable enough to scale to other geographies and cultures.

In Part 2 tomorrow we will cover Bruce's thoughts about the current enterprise market.