My friend and a partner at Wildcat Venture Partners, Bruce Cleveland, along with his associates, has come up with an idea that helps explain why some early-stage companies thrive and thus raise more capital, while others die on the vine.
As a venture capitalist, he is always trying to figure this out, trying to determine who gets another round of funding and who doesn't. If you are a high-net-worth individual parking money in a VC firm, that should be comforting.
Cleveland's idea comes from Eric Ries, founder of the blog Startup Lessons Learned.
"What matters is proving the viability of the company's business model, what investors call 'traction.' Demonstrating traction is the true purpose of revenue in an early growth company," Ries said.
Now, before we award anyone a Nobel Prize, that is pretty much what Geoffrey Moore was talking about in the 1990s when he coined "crossing the chasm." New or recycled, however, the idea bears renewed consideration, especially in this advanced marketing age.
Show Your Worth
Traditionally, the CEO of a startup is on the road a lot, mostly to raise money for the fledgling company, and in normal times there's money to be raised and companies get funding. The goal is to keep all the product development balls in the air while finding and metabolizing OPM -- other people's money.
Even in great times, not every startup gets a second or third round. By those points, you need something to show for what you've spent. Usually that has meant a minimally viable product, or MVP.
Even with an MVP, though, it's not always clear what the product would be good for. Remember Moore's assertion in the chasm crossing model that early adopters were there to figure it all out, working side by side with product developers to achieve the rationale for a solution?
All that's fine, but it isn't enough anymore. For one thing, the crossing model doesn't necessarily show a path to revenue, and for another, these days anyone can make a pretty good product with few inputs.
The dividing line between success and failure has moved from having an MVP and a few customers willing to play with it to a model that shows how revenue gets generated.
The Traction Challenge
That's where traction comes in, and it's why I think we'd all be smart to pay attention to how emerging companies are doing their marketing and especially what constellation of marketing tools they use.
It's actually a good time for those ideas to converge. Historically, marketers had played a quantity versus quality game, trying to generate as many leads as possible for sales reps at early-stage companies to pursue. Unfortunately, though, there are never enough leads -- or at least there are never enough good leads -- so gaining traction has been a proposition based on luck.
Last week, Full Circle introduced a campaign attribution solution that could do a lot to help companies facing a traction challenge or just an old-fashioned chasm.
Campaign attribution is an analytic idea that tries to figure out what campaign or part of one a customer responds to. What's the right message? How many touches does it take? What's the job title of the best target customer? How long after breaking through does revenue come in? How often do salespeople reach dead ends?
Those and many other questions can be answered in timely ways for the traction challenged, and it's a big deal. Getting answers to those kinds of questions is how startups can begin to prove to their investors that their business models are on track. Even beyond early traction, those are questions that most companies in competitive markets increasingly need answers to.
Campaign attribution is a great example of technology enabling new business processes and models. Sure, back in the day you could always figure out campaign attribution using a spreadsheet, but maybe you couldn't do it in time to have a positive effect on your business. Attribution done that way might have served a purpose in postmortems for investors, but it was hardly useful in the moment.
It could be a coincidence, but lately I've noticed a slowdown in spending by emerging companies that already have raised a good deal of funding but that may not have built a strong traction case. Those companies seem to be conserving cash, trying to make it last until the next tranche. They might be well advised to recheck their approaches to marketing and re-evaluate their tactics for gaining traction.
May 30, 2016