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. Granted, that's not their fault. Both factors though are realities which have led to you, to too many people, hearing that you have to have customers.
Let me let you in on a secret....
MOST, dare I say 90% of innovation, is funded WITHOUT customers.
- New movies (film)
- Residential home building
- Commercial construction
- Medicine
- R&D
- Video game development
For some reason, tech related startups have been thrust into this mantra that you have to have customers.
Let me let you in on another little secret. Microsoft was built without customers, so was Google, as was Twitter, Facebook, and more. In their earliest days and in some cases for years, they went without any revenue of note. Many are famous for not giving a damn how they make money.
For some reason, many of our incubators, books, advisors, and angel investors are telling startups they need to have traction in the form of customers.
What gives?! Where's the disconnect??
First, think about the traditional experiences and expectations of investors:
- 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 in any way because they have the means to move companies to later stages putting multiple millions of dollars into companies to get modest but sizeable returns.
Are those the behaviors of the investors with which you deal? Increasingly typically not. Angels need to be taught what you're doing. Why?
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... funding means you get capital from banks.
Banks. And really, why would you go anywhere else for 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, 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, looking at the headway you have with customers and thinking 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.
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 and funding marketing only when there is an ROI to acquire a customer.
It may sound like a foreign idea to you. After all, for the better part of a decade Marketing has taken a beat down as while the investor community has tried to keep pace with tech, the marketing community has had to do the same and the hard truth is, most marketers are crap. Founders have a bad experience, investors hear a bad experience, everyone starts asking only for leads and customers and like any half way decent marketer, marketers start schlocking customers, growth hacking, and leads.
And companies continue to fail to meet investor expectations. Investors continue to hear that marketing isn't worth it. Everyone keeps pushing for more customers, and fewer and fewer things deliver real investor return. Causing this question to happen.... wait, I just heard about Unicorn that had no customers... how the hell did they do that!?!?
Careful, investors who don't know aren't going to admit that. They certainly aren't going to show their complete ignorance about everything you're doing, but they read a book that said Customers validate the business....
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 inno... (sorry, can't help but make a poor attempt at humor when I rant), 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 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?
- 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 can you outperform them in some way?
- 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?!
Alright, having written the longest post I've ever written to FounderDating, I'll cut myself off (Truth be told, this was good for me as I'm doing a talk on this in Austin on Tuesday so thanks!). Here are some other thoughts
TLDR; traction does NOT only refer to paying customers
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