Discussions About Getting Sales Traction
Today’s venture capitalists look to market and sales traction, or “referenceability,” as the single most important element before investing in a new business venture. Brooke Seawell, general partner of Palo Alto-based Technology Crossover Partners, which invests primarily in expansion and late-stage start-ups, says, “The most important thing is, can I go to four or five referenceable customers who can tell me why they like this company over competitors.”
In the old days, an entrepreneur could sit at the closing table in a venture capitalist’s office and point to a slide showing the cumulative number of years behind the sales force that will be coming from the corporate world to work for the new venture. This left the investor to guess what might happen on day one after the investment.
Well no longer, as investors are not too comfortable with guessing today. The historical track record of the sales team alone is not enough to get a venture to the launching pad and get it fueled, especially in an environment of constrained capital expenditures across all sectors of buyers.
Today, in these uncertain times, it is imperative that you identify the marquee customers. Validation means you have placed betas and working hack models with customers who believe in what you intend to build out. You must have them lined up and ready to tell your potential investors, your strategic partners, and your competitors that your product is a “must-have.”
Remember, the VCs do not want to be the first ones sold, they want to see sales traction.
The “Catch-22” is the fact that marquee customers want to see traction too. Recall from discussions about the competitive advantage where the domain expertise and what Porter calls “advantaged relationships” come into play. Any customer worth having today got burned yesterday.
Expect a comprehensive due diligence process, even from customers.
– They will be assessing your financial health, even to the extent of going over your financials with their accounting/finance experts
– They will be asking tough questions about how much cash you have in the bank, how well funded you are, and who your investors/backers are.
– For technology-related products, they’ll want to know how much you are investing in R&D, whether you have a famous, well-known “mad scientist,” and who else is on your R&D team and what are their credentials.
– They will be conducting reference checks, checking up on current customers, and reviewing your client list.
– Is your client list growing?
– And who are considered your major accounts?
– Finally, they will be looking over your business partners. Who are they? Are they solid financially?
– And how much and what of the total solution will be outsourced by your venture?
Put on Your Tire Chains Here
The best barrier to entry is sales traction in the market. We now provide some ideas and suggestions for finding traction in different market environments, based on the work of some influential thought leaders, especially Porter and Kotler.
– Finding Traction in an Emerging Market
Remember, you have to persuade marquee customers that they need you; you become a “must-have.” It involves educating the marketplace, maybe going against the biggest competitors and some established norms in the industry. Are you prepared to be in the education business, as well as your original business? Examples are holding seminars, conferences, and meetings in order to educate the industry about the benefits of your solution. Can you be supplying the supplier rather than a direct participant?
– Finding Traction in a Growing Market
Growth and profits will come easily to anyone who drops a line in the water. You will need to satisfy the customers quickly or someone else will. Also, a growing market attracts new entrants, which will force “reactionary pricing” by the established players. You know, this could be your only chance to make it big really quickly. Are you structured for this growth, do you have a growth strategy?
– Finding Traction in a Mature Market
Growth can be achieved but it will be difficult. The market is proven, the rules are written, and the norms are established. You will find that the “pie” is not finite. You will have to come in through a niche and be prepared to defend it. Consider how fragmented is the industry? Who are the leaders? Do you really have the best product for this ecosystem? Have you considered being an innovator and enabler in another industry? Or can you identify subsegments of your industry that might be growing faster than the other segments? Can you identify micro-niches where being small can provide an advantage? Would it be possible to enter a market with a product you have now, then introduce innovative upgrades? How about seeing opportunities visible to you but not visible to leaders in your industry? Finally, are you prepared to lead the industry change, as there might be fast followers in your wake?
– Finding Traction in a Declining Market
How can you position your venture as viable and growing in a declining industry? Consider that some competitors will be dropping out of the market, which might be enough to leave you some headroom for growth, or at least some breathing room to quickly plant some roots, and then later move into other markets. Can you get started here and then diversify into other industry sectors? Or you could be known as the “last-to-leave” in the industry, meaning you could buy up other inventory, their customer accounts, know-how, even partner with industry leaders to takeover their accounts.