Recently, David Baeza, CEO at Buttered Toast, sat down with Bruce Cleveland, a Founding Partner at Wildcat Venture Partners. Bruce is about to publish his book, Traversing the Traction Gap, which introduces an entirely new framework for startups to think about how to take their startup from ideation to scale.
David Baeza (DB): Hey Bruce. Thanks for chatting with me today.
Bruce (B): My pleasure.
DB: So, your professional experience is rooted in some legendary Silicon Valley companies. Can you explain how this experience shaped your path to becoming a VC? And how that then shaped your path to writing this book?
B: That’s a provocative question. This is one of those things where you need to be good, but you also need to be lucky. Here’s how I got involved working in Silicon Valley.
In the early eighties, I worked at AT&T Information Systems. I was tasked with building a system that could serve the state of Washington; a database that could work across a range of different technologies. Back then that was radical and unique. Looking around, I found this tiny private company called Oracle that I thought might offer a solution.
B: I know. But they were virtually unknown then. I called them up and was put in touch with Tom Siebel, who said we should get together in a couple of days. Eventually, Tom said “come work for me.” I was interested, and went for lunch with Larry Ellison, and Larry told me “we’re gonna be a multi-billion dollar company, we’re gonna put IBM in its place,” and all these other “crazy things”! But I thought, I like this guy, I like his ambition, so I joined. That was in 1985.
“That decision to go and work with Tom Siebel and Larry Ellison was one of the smartest things I’ve ever done. It gave me so much insight into what it means to build a globally successful company.”
B: Yeah. The decision to go and work with Tom Siebel and Larry Ellison was one of the smartest things I’ve ever done. It gave me so much insight into what it means to build a globally successful company. It’s no coincidence that if you look around now, many successful founders and CEOs worked for Oracle in the early days. I suspect that in the next 10, 20 years we’ll see the same thing: the most successful founders will have spent time at Facebook, Google, Salesforce, and so on.
DB: So what came after Oracle?
B: So after Oracle I worked at Apple for five years running an engineering division. While I was there Apple began to flounder; this was right before Jobs came back. Tom called me and said he had a project he felt was showing “a modicum of promise.” This was in 1996. Four years later this “project” was a company generating nearly two-billion dollars per year with eight-thousand people. I believe it is still one of the fastest growing companies in US history. I performed a number of roles for Tom over the decade I was at Siebel; I ran alliances, marketing, the On Demand product division and eventually I took over the entire Siebel product division. In September of 2005, Tom elected to sell Siebel Systems to Oracle for about $6B.
These experiences showed me what was required to take a startup from effectively nothing to become one of the most successful companies in Silicon Valley history. I was fortunate I was able to go through all of those phases of growth and able to see everything that’s involved.
DB: Were you involved in venture capital yet?
B: After we sold Siebel to Oracle, I wanted to try something entirely different: venture capital. The firm I elected to join wanted to build an early stage software practice and I ended up staying there for ten years. As I had no prior experience working with the venture capital industry, I learned a lot about venture capital during my tenure.
One of the first investment ideas I brought with me came from my experience at Siebel where we had developed fairly rigorous revenue models in my marketing division. These models were created by Wharton MBAs we had hired with significant quantitative backgrounds. We used these models to begin to make predictions about what Siebel’s “future quarter revenue” might be; the revenue in the quarters beyond the current quarter.
I thought there might be an opportunity to build an application suite that enabled CMOs and their marketing teams to be viewed as a revenue generation function v a cost center; what I affectionately called at the time – with tongue in cheek – “a party planning function”.
I considered putting together and funding a team to prosecute this idea but – fortuitously – I was introduced to three people with a similar – even better – idea in the summer of 2006. They didn’t have any code or customers at the time but they had a bold vision; transform the role of the CMO so it would be viewed with equal stature as the Chief Revenue Officer. Those three people were the founding team of Marketo.
As Marketo transformed from being just an idea into a company, I watched how the founding team managed that process. Many of the things they did were similar to the way I had observed Tom Siebel build Siebel Systems and Larry Ellison build Oracle. Over time, with my other early stage investments, I observed a pattern of success, and a pattern of failure, that were common to those early stage startups that made it, and those that didn’t. And, universally, it was never technology, never the product engineering.
When I decided to join two other experienced investors to create Wildcat Venture Partners, I brought my observations with me in the form of a nascent framework I had developed. The principles of the framework were based on my experience and were the foundational principles that I had observed to generate startup success.
I shared with my partners that I had found that the preponderance of startup failure rates – more than 80% – was seldom related to the go-to-product phase; the product creation period of time. The time period that kneecapped most startups was the go-to-market phase. The epiphany I had was that early stage companies are usually comprised of great engineers, but are seldom highly experienced with how to take their ideas and companies to market. I came up with this term: market engineering, to describe all the tasks that startups must perform to adequately engineer the market. Lack of market engineering skills is the root cause of most startup failures. Entrepreneurs either don’t know how or don’t put in the significant effort required to perform tasks such as category creation/redefinition, market validation, value propositions, pricing models before bringing their products to market.
“Early stage companies are usually comprised of great engineers, but are seldom highly experienced with how to take their ideas and companies to market. I came up with this term: market engineering, to describe all the tasks that startups must perform to adequately engineer the market. Lack of market engineering skills is the root cause of most startup failures.”
DB: And this was the operating and investing experience you brought to Wildcat Venture Partner?
B: Yes. I have twenty-five years of operating experience – with companies such as Oracle and Siebel Systems which were early stage startups when I joined but quickly became market leaders generating $Bs annually and valued at multiple $Bs – along with ten years of experience investing in early stage startups such as Marketo and Workday and now C3 and Vlocity –which have all become market leaders. Working with those phenomenal executives and teams had given me some unique insights into what is required to build a startup into a global market leader. I felt I could codify this body of knowledge and incorporate it into the branding of Wildcat. I believed we could use the Traction Gap Framework as both an early stage playbook we could use with entrepreneurs to help them become successful and as a way to generate awareness and interest by entrepreneurs in our new venture firm.
DB: And your unique concepts and ideas are the basis of your new book, Traversing the Traction Gap. Let me change tack a little. Writing a book is very different to building a business. In writing this book, what was the hardest part, for you?
B: Well, the first challenge was to reduce a lot of different concepts into a strict taxonomy. I needed to write this in a way that would be easy to digest. I wanted the book to be pragmatic, and usable. But I had to take 30+ years of operating and investing experience and consolidate it into a set of principles and processes. That’s what led me to create the four foundational Traction Gap Framework architectural pillars: product, revenue, team, systems and a set of chronological value inflection points that go from startup ideation to scale. Once I developed the taxonomy, the book was relatively straightforward to write.
DB: And it’s a very ambitious book.
B: I really would like to transform the way all of us talk about our companies: entrepreneurs, venture investors, and limited partners. If you think about it, talking about startups in terms of their funding (e.g., we’re a Series x company), really doesn’t give anyone any idea of a startup’s true maturity.
DB: This was one of my favourite sections of the book. Let me read an excerpt: “Every venture firm, entrepreneur, angel investor, and limited partner tends to refer to a startup based upon its latest financing round—Series Seed, A, B, C, . . . and so on—and we are forced to use those terms as well because they are the accepted industry vernacular. But financing rounds are actually a terrible proxy for a startup’s maturity. In fact, they provide little insight into the true progress of these formative companies.”
Let me ask, then: Why are they such a terrible proxy? What would be a better way?
“Financing rounds are actually a terrible proxy for a startup’s maturity. In fact, they provide little insight into the true progress of these formative companies.”
B: Well let me give you an example. We have a company that is on its fifth round of financing. It took that many rounds just to reach minimum viable product. But this is because it’s a very complex product. It took that many rounds to develop the technology to a point where it was ready to be commercialized. This is just one example but it’s a good one. It shows you that financing rounds don’t tell you much, if anything, about the state of the team, the trajectory of the product, what’s really going on at the company. It doesn’t tell you if the company is on target to succeed.
Using the metrics and the vernacular I propose in my book gives you a much better idea of the progress a company is making, where it is in relation to its target objectives. If we all use Traction Gap Framework terms, we can actually determine what type of progress the startup is making because these terms have real metrics associated with them. They’re quantifiable. At my firm, this is the only way we talk about startups now. If you use Traction Gap Framework terminology (e.g., MVC, IPR, MVP, MVR and MVT) these are all defined terms and value inflection points. It gives us a way to speak with ourselves, entrepreneurs and with limited partners so that we all have real clarity on where the startup stands and what it must do to get to the next point.
DB: I totally agree. I’m deeply immersed with early-stage startups, and every time they secure a new round of funding, it’s high fives all round. Which is understandable; it’s a mark of progress, of a sort. But it isn’t necessarily any indication of market traction at all.
Let me use this idea to dovetail into another quote from the book: “Most entrepreneurs don’t really understand that they need to engineer two products: one that they sell to businesses or consumers, and the other a financial product—their company—that they must sell to investors.”
Can you elaborate on this a bit more?
“If you’re speaking to investors, you have to speak specifically in financial terms. You are presenting to someone whose primary focus is forecasting and generating a financial return. They need to know how your startup will generate value. But, most entrepreneurs tend to give presentations that focus on the product they intend to market and sell to businesses or consumers. They don’t realize that they must create a product for investors – a financial product. That requires a different type of presentation. What I’m saying is when you are speaking with a venture investor, you’re talking to an investor, not a user. So, you need a presentation designed for that audience.”
B: Sure. So, the vast majority of entrepreneurs understand their product, and the way they present their company is about the product. What they don’t understand is that at this stage, with very little signal from the market, it’s very hard for the investor to grasp whether or not the product they’re talking about has real value. If they’re from the industry, if they have inside knowledge, that might be different, but that’s rare.
So, if you’re speaking to investors, you have to speak specifically in financial terms. You are presenting to someone whose primary focus is forecasting and generating a financial return. They need to know how your startup will generate value. But, most entrepreneurs tend to give presentations that focus on the product they intend to market and sell to businesses or consumers. They don’t realize that they must create a product for investors – a financial product. That requires a different type of presentation. What I’m saying is when you are speaking with a venture investor, you’re talking to an investor, not a user. So, you need a presentation designed for that audience. I want to put that in black and white.
DB: So to someone who is producing an investor deck, and looking to go out for a round, what specific advice would you give? Don’t dump the financial details at the end; anything else?
B: In short, realize that most startups don’t fail in the go-to-product phase, most fail in the go-to-market phase. So, make sure you put a significant amount of effort into explaining how you intend to “engineer a market”. Most teams, I believe, can build a product, fine. But, what I really want to know is how you are going to make a splash in the marketplace: become a global market leader? If you haven’t thought about this stuff, then I’m concerned you may not know what you’re doing and I don’t want to pay for that inexperience.
DB: I work with a lot of early-stage technical founders. And the best ones I’ve worked with, they’re smart, but they’re also malleable. Very interested in learning, very humble. They realize that messaging, to quote Tom Moore, is “truth in motion.” Messaging is constantly evolving, and they see that.
“Going to market is like a linear regression problem where the variables are constantly in flux. People are trying to come out with “the” answer, like on an SAT test. Unfortunately, there is typically no rote answer in the world of startups. This is more like theoretical physics than applied physics.”
B: Exactly. Going to market is like a linear regression problem where the variables are constantly in flux. People are trying to come out with “the” answer, like on an SAT test. Unfortunately, there is typically no rote answer in the world of startups. This is more like theoretical physics than applied physics.
DB: So, wrapping up here, let me ask you. With Traversing the Traction Gap, what are the big one or two takeaways? How would you boil it down?
B: Super short version? We need our startup leaders to become market engineers. I believe that is our challenge; to teach people to go beyond being great product engineers. They must become market engineers as well. I don’t mean they need to become marketers. But they need to understand how critical category creation is, and what it takes. And if they don’t have those skills themselves, they need to bring someone else in.
That’s one takeaway. A second takeaway would be: This is a framework that you need in order to reach the value inflection points that really matter to investors. Investors want to see demonstrable traction. If you internalize the Traction Gap principles and value inflection points, and use this language with your team, and with your investors, you’ll find that it’s a phenomenal shorthand that keeps everybody on the same page. These concepts create a north star for your entire team.
If people take only those two things away from the book, that would be a home run.