How to get a company off the ground

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

Credit: Chris Gash

Waverly Deutsch

Waverly Deutsch | Feb 28, 2018

Sections Entrepreneurship

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. 

Launching a new venture is incredibly difficult. Entrepreneurs must take a concept from an idea through building a product or service to engaging customers, recruiting a full team, establishing processes, and scaling operations in order to become a profitable, self-sustaining company. What Lean Startup does for entrepreneurs is help them begin the process by telling them exactly what to do—how to learn about their market and customers, how to develop and test a product or service offering, and how to iteratively refine it to find product-market fit. The methodology defines success in the earliest stages of building a new venture. But it has led many entrepreneurs to believe that having an MVP and a handful of customers equates to having a viable business. Not so. It takes a lot more. 

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. 

Bridging the traction gap

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.

The entrepreneur’s runway
While Eric Ries’s Lean Startup movement is the defining methodology for young start-ups and Geoffrey Moore’s book Crossing the Chasm is the blueprint for large-scale success, VC company Wildcat Venture Partners is developing a methodology for the time in between, called the Traction Gap.

The Lean Startup: Go-to-product phase (12–24 months)

The Traction Gap: Go-to-market phase (24–36 months)

Crossing the Chasm: Go-to-scale phase (36+ months)

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. 

Building on Lean Startup’s vocabulary, Wildcat’s Traction Gap defines two key inflection points: minimum viable repeatability (MVR) and minimum viable traction (MVT). 

MVR indicates that a company has demonstrated a repeatable process for acquiring customers. It has learned enough about go-to-market that its product positioning and marketing messages are clear to prospective customers. It has reference customers (who will tell others that a product works as claimed), and it understands something of its sales process, and response metrics and conversion-rate metrics. 

Additionally, while Traction Gap’s methodology focuses on marketing and sales, it also defines what the company has to do in other areas. So MVR also demonstrates that a company can execute a product development and launch sequence and successfully implement its solution with customers, repeatedly. The airplane is gathering momentum down the runway.

MVT indicates liftoff. This occurs when the company achieves steady quarter-over-quarter growth for 12 to 18 months, during which time it has collected data, improved its processes, and become more efficient. It has survived the Traction Gap and is set to scale up—by expanding to new markets and introducing new offerings.

What makes the Traction Gap framework so useful to entrepreneurs is that it is actionable—it defines the areas of business operations that founders must focus on and develop competencies in. The four pillars that need to be strengthened in order to get to MVT are product, revenue, team, and systems. Today, the Traction Gap Institute, affiliated with Wildcat, offers guidance for how to advance in each area. Through blog posts, videos, workshops, and engagements with expert consulting partners, it outlines, for example, how to know when a company has gotten too large for QuickBooks and needs a more robust accounting system, when to hire a CFO, or how to effectively engage with a board of directors.

Reverse engineering the milestone data

An airplane needs sufficient speed for the wings to generate enough lift to get the plane off the ground. The exact speed and thrust required varies based on the length of the runway, weight of the aircraft, configuration of the aircraft’s flaps, and headwinds. So too, businesses with varied models and markets will use different metrics to identify their MVR and MVT inflection points. While engineering and mathematics have allowed scientists to calculate these numbers for airplane pilots, there is less information available to the entrepreneur to assess progress.

Again relying on its team’s core expertise, Wildcat parsed data from the S-1 filings of 60 public companies, and from private companies the team had been involved with, to see what numbers successful B2B SaaS companies achieve, and when they reach their MVR and MVT milestones. 

The data indicate that the time from start-up to first product launch averages 12–18 months. At that point, companies begin receiving feedback from customers and using that to improve their products. This process, which typically takes an additional six months, can involve several rounds, until companies achieve an MVP they feel indicates they are ready to launch their product to a broader public market. Moving from MVP to MVR, or from $0 to $2 million in annual recurring revenue, takes another 18 months. Then, over the next 12–18 months, successful SaaS companies achieve steady quarter-over-quarter growth and reach the MVT inflection point, of $6 million in annual revenue or $500,000 of monthly recurring revenue.

These numbers can help SaaS entrepreneurs establish milestones and timelines to help them do two things: decide whether their business is working and understand how venture investors will evaluate them. Hopefully, data like these can also help entrepreneurs create no-go metrics—numbers below which they will realize that their businesses don’t work. In a previous essay based on analysis of the Kauffman Firm Study data set, I wrote that if a company doesn’t learn how to sell in its first two to three years, it will very likely never do so. Wildcat’s model reinforces this timeline. Too often entrepreneurs cling to companies that have fatal flaws in their business models, value propositions, or execution—throwing good money after bad only to see the same problems year after year. 

Wildcat’s milestones also support, with a broader base of data, the trajectory that Battery Ventures, a well-known VC firm, identified in its “triple, triple, double, double, double” model for B2B SaaS companies, or T2D3 for short. That model shows SaaS companies first getting to $2 million in topline revenue, in the next two years tripling to $6 million then again to $18 million, then over the next three years doubling three times to $36 million, $72 million, and $144 million. This growth rate puts both a billion-dollar valuation and potential IPO in sight.

Will the Traction Gap Institute become the next Lean Startup movement?

The Traction Gap project is in its earliest phase—really just a start-up itself. The Traction Gap Institute was launched in 2016 but already boasts more than 500 member companies. The first version of both the data and tools comes largely from its creators’ experiences in starting, scaling, and investing in B2B SaaS companies. To be broadly applicable and truly useful to entrepreneurs worldwide, it needs to mature. The institute needs to collect and share similar data for other high-growth business models, including B2C apps, e-commerce, companies that offer physical rather than virtual products, retail ventures, and services models. The actionable tools being built around the framework of product, revenue, team, and systems—providing guidance about when to invest in specific kinds of software, or who to hire, and so forth—need to be extended and widely published. (Cleveland promises a Traction Gap book in the not-too-distant future.) 

But the Traction Gap is already drawing thought leaders such as Crossing the Chasm’s Moore, expert on scaling technology companies, and John Baird, one of the premiere executive coaches in Silicon Valley, to contribute to the intellectual capital of the initiative. And even in its current stage of development, the Traction Gap Institute can be a resource for entrepreneurs as they transition from creating that perfect product to generating sustainable revenue—by helping them identify the critical inflection points for their businesses, demonstrating a methodology of research and modeling to set milestone goals, and focusing them on building their go-to-market engines using the four pillars of product, revenue, team, and systems. 

As Cleveland puts it, “There needs to be as much attention to the revenue architecture as there is on your product architecture—and most teams don’t do it.”

Waverly Deutsch is clinical professor and academic director of university-wide entrepreneurship content at Chicago Booth.