In Q3, ICO markets finally developed a demand for traction.
The ICO market has experienced a sudden cultural shift that has left concept-stage blockchain founders grappling with the same increased demand for evidence of traction that has long stymied founders trying to raise capital in traditional VC markets. The median ICO dollar size and overall volume of deals have dropped by half since a peak in Q1 of 2018.
Pressure for earlier validation has mounted from their blockchain peers as well. At cryptocurrency conferences, technologists from established initiatives have been exhibiting an ostensible lack of acceptance for concept-stage projects. Blockchain thought leaders openly share their consensus view that projects launching large public ICOs, without any proof-of-concept or market adoption, are drawing negative attention to the entire cryptocurrency movement.
Dramatically improve the odds of your venture’s success by rooting out and mitigating knowable risks with a premortem.
In startup culture, optimism tends to flourish at the expense of honest pessimism. At Foundational, we embrace this by starting our strategy engagements collaborating with our clients to agree on how the world must be changing, what their teams are doing to bring about that change, and how we will measure the achievement of their inevitable success… we also use a novel process that quickly identifies the likely causes of failure well before they occur. It’s a simple and impactful technique that any team can do for themselves in under an hour.
Trust is the missing feature your customers demand.
Foundational has found that most healthcare technology startups’ greatest business challenges are fundamentally related to building trust with their end-users. While all startups face the challenge of trust, the healthcare space most clearly illustrates the need to interweave it throughout a product’s value proposition and core values. We’ve seen the impact of fine-tuning these two specific areas improve first-time user onboarding completion by as much as 300%.
What is Traction? Where does it come from? And, most importantly, how do you generate it?
Startups are in an endless pursuit of product-market fit. If they are very young, they might still be defining their vision of what the world will look like should they find it. If they are more mature, they are justifying to their next round of investors and strategic hires that they are strengthening their understanding of the early fit they’ve already established. This road is so well-traveled that the industry has adopted a name for the story of this pursuit: traction.
The #1 cause of death for startups is a self-inflicted wound
The Product Management Gap is the period of time between having a successful demonstration of a technical innovation (the proof-of-concept) and when a full-time team member is assigned to focus on managing the product(s) that feature it.
Early-stage funded startups commonly have employees focused on engineering, design, marketing and sales, but rarely do they have a team member dedicated to the one thing they need to get right to raise additional capital: product-market fit.
…and how to get VCs to give them to you. These common traits define every startup successfully raising venture capital in today’s traction-centric market.
What it Takes to Raise a First Round
VCs are ultimately judged by their own investors on their Internal Rate of Return (IRR). In order to optimize that metric they need to time their investments so they’re getting in at exactly the right point in history… or at least they need to feel that way. It’s up to startup founders to create the sense that this time is NOW.
An early-stage investor will back a company once they believe they will see a substantial return on their capital in a reasonably short time horizon. For a seed-stage fund that’s about 20x in a 5-7 year time-frame (or about 1x the entire fund’s size). In today’s market of rising seed valuations, GPs at funds are looking for real product traction and simply won’t be interested if they think a startup still has major go-to-market assumptions to figure out.
If you are successful at defining metrics that tell a narrative of traction, measure progress towards increasing them, and regularly update your most interested potential investors on that progress, then the barriers to raising capital will begin to crumble quickly.
The precondition for this is that founders need to have effective conversations with actual VCs in order to understand what investors perceive as the venture’s core assumptions. Here’s the trick for how to get started…
How rising VC expectations are causing founders to ignore user experiences in favor of unsustainable growth.
The trouble with innovation…
Through my experience as a repeat technical startup founder, I’ve found the greatest difficulty in developing a new technology is not getting something to function. It’s discovering that a user’s tolerance for learning a new workflow is frustratingly low. People are seeing something that’s different, but they are experiencing it through the lens of expectations they’ve been refining over their entire lives… expectations anchored by existing solutions that are measurably worse than the shiny new one.
There is some amount of friction inherent to the adoption of any innovation. A company must immediately convey the value of what they’ve spent months, or years, building. In the world of software, there’s a very brief window of time when a potential user can be convinced that a product meets their need. If a user is not aware of their need at this point in time, then the company faces the additional challenge of educating a consumer. Good Luck!
In no other context is this friction as essential to overcome quickly as in that of a startup. Startups are organizations with a lit fuse. Financial backers have given them a chance to test a new idea. They are operating at a loss, and will go out of business unless they raise additional capital in the near future… and that’s with a dedicated team working long hours at below-market salaries. Investors, employees, and even the founders assume this risk because they believe that their efforts will eventually be rewarded by a lucrative market segment in dire need of their offering.
Why so many startups fail so early.
Everybody knows most startups fail, but what’s surprising is that 70% of seed-funded companies do not survive long enough to raise a subsequent round. In the venture community, this trend is better known as the Series A Crunch, and I believe it’s a consequence of rushing to market without having established sufficient product desirability — or, in Venture Capitalist parlance, traction.
Our perspectives, learnings, and insights on Traction Science, venture capital, and product management best practices.