A far too frequently overheard conversation in the startup community goes something like this:
“Apparently neither Instagram nor Snapchat had paying customers while receiving both seed and series A funding?! I couldn’t believe it. Investors, advisors, and incubators these days are constantly trumpeting that a monetization model (or at least an anticipated revenue trajectory) is critical to a business plan. Without one, no investor will give you the time of day. But…apparently they will? Can high user-acquisition volume alone (assuming the team is strong too) still draw heavy funding? How?? I know traction can speak volumes, but still…really?”
Perhaps, just perhaps, we’re being mislead or misguided as to what traction means.
Lean Startup has really done a number on entrepreneurship. Worse, frankly as that’s not really to blame, as tech has perpetuated the world and innovation and entrepreneurship have left Silicon Valley for your neighbor’s garage, investors have naturally been unable to keep pace. Think about it, what happens if the money doesn’t have experience with what you’re doing? Do you think someone who found wealth in real estate naturally takes risk funding Oil & Gas speculation? Granted, that gap is not their fault.
But both factors, investor sophistication and the impact of methodologies to find success in entrepreneurship, are realities which have led to you, to too many people, hearing that you have to have customers.
- New movies (film)
- Residential home building
- Commercial construction
- Video game development
- Banks (yes investors), don’t understand what you do nor really care, but you have to deliver an immediate return
- Angel investors, SHOULD know intimately what you do and have the means and desire to pay it forward, seeking a very long term return.
- Venture Capital investors, SHOULD know your industry but not necessarily your niche and they’re obligated (in a sense) to deliver returns for LPs so their time table is a little more risk averse than Angels; but they know the industry and market, so they can make greater investments for relatively lesser returns.
- Private Equity investors find validation through partners, corporations, and the like. They know the space but not necessarily intimately because they have the means to move companies to later stages, putting multiple millions of dollars into companies to get modest but sizeable returns.
As tech has perpetuated the world and innovation and entrepreneurship have left Silicon Valley for your neighbor’s garage, investors have naturally been unable to keep pace.
What is traction?? Why are other industries so well funded without customers? Traction actually means a great many things as it is really nothing more than evidence of opportunity. Lean Startup did a number on us by trying to simplify the path to a degree of success by saying that Customer Validation was paramount. In some cases, it is, but when thrust into a world that hasn’t spent the last 30 years working with tech, when thrust in to a world where the investors have no idea how the tech works, how it scales, how it makes money and so forth, EVERYONE took that too heart and heard Customer Validation = Having Customers and Having Customers means getting funded.
That may well be one of the biggest frauds unintentionally perpetuated and yet significantly consequential in innovation.
As a result, now incubators, investors, and advisors, ignorant of any other way, are constantly telling entrepreneurs they have to have revenue to get funding. But think back to the original role of those investor types… revenue means you get capital from banks (or later stage VCs). Banks. And really, why would you go anywhere else for early funding??? Banks have the lowest cost of capital as an entrepreneur when you consider that you need not give up any equity in your business to get a loan. Of course, that presumes you can get one but how can you not when you have revenue??
So here we are, chasing Angels and VCs and failing to find or communicate any other traction than customer (because that’s what we’re hearing they want) and they, generally not knowing how to see any other form of traction anyway, look at the headway you have with customers and think eh…. I’ll just wait on the sidelines since I don’t understand it anyway and when they get MORE customers, I’ll write a check.
And our venture capital economy collapses. When you have revenue, you can service debt, pay back loans, and more. Revenue alone doesn’t meet the needs of investors and thus investor returns will continue to suffer as long as we focus alone on customers.
How do we break this?
First, entrepreneurs have to appreciate once again that Marketing is not advertising or lead gen. Founders have to stop believing that customers are all that matter; funding marketing only when there is an ROI to acquire a customer.
Famed economist Peter Drucker once put, decades ago, I’m paraphrasing, that “only Innovation and Marketing create value in business, everything else is a cost, and Marketing is the distinguishing of the two.” I assure you, he wasn’t talking about the marketers who get you customers and leads.
If innovation is the creation, marketing is the intelligence. I don’t mean that to sound like I’m saying innovation (or innovators) is ignorant; I mean intelligence in the sense of data, information, and answers. MARKETing is the practice of the Market whereas innovation is the practice of the innov… (sorry, attempting and not funding an amusing play on words there), let’s call it engineering and invention which are the engines of inventions.
Engineered inventions without marketing are those things you see on As Seen on TV or the failed inventions that get sent to Provo, Utah for an Inventors Certificate and a free book and membership card to Inventors Club of America.
Movies, new real estate developments, medicines, and more get billions in funding because they have done the marketing to know in what to invest, why, when, where, how, and for whom. They know who is going to buy the product, at what price, and with what return before they even begin the R&D. Investment funds known opportunities.
Sure, not all investments find Deadpool and Viagra as at the end of the day it’s still investment and that means RISK but the marketing is the FIRST investment so as to find traction in dozens of different ways such that opportunity is validated for investors WITHOUT customers.
Imagine what that entails, for example:
- Does the media like your idea?
- What have competitors tried and failed?
- How can you outperform them in some way?
- Do you know your conversion and cost per acquisition metrics?
- Have you determined what you need to invest and when, or are you supposing?
- How big is the market? Wait wait wait... this is where most pitch decks highlight the $100 billion dollar market for the entire industry of things related to what they’re doing. Fail. How big is YOUR market at this seed stage and at the investment you want to make? What will it take for you to get 5% of that tiny niche of market? No idea? Okay, we’ll wait till you prove you can do it by getting customers.
- What kind of traction do you have acquiring a team? Yes, traction is in your ACQUIRING your team as well…. do you have an incredible cofounder, advisor, and head of Sales? No?! You can’t convince people to work with you on something yet you want others to just give you money?!
Peaked your interest? This is a long enough article as it is so let me steer you further here…
- Removing Barriers to Scale – Marketing Before Raising Capital
- What it Takes to Raise Money
- Startup Marketing Metrics that Matter
- Perfect Pitch