The Traction Gap Meets Crossing the Chasm
by Geoffrey Moore | Venture Partner, Wildcat Venture Partners
Early stage venture capital firms specialize in incubating start-ups and taking them to scale. This entails working through a series of deep changes in both strategy and operating model over a very short period of time. Many an entrepreneur, and many an investor, have lost their way during this era of “pivots.” Crossing the Chasm and The Traction Gap provide playbooks for how to navigate these changes.
Crossing the Chasm focuses on the external market dynamics that shape technology adoption, and in that context, the changes in strategy and execution needed to transition a customer base from early adopters to the early majority.
The Traction Gap, by contrast, focuses on the internal operating dynamics that shape changes in company valuations, and in that context, the actions needed to be taken with each round of funding in order to ensure a higher valuation in the next round.
More specifically, when crossing the chasm, companies need to abandon their disruption-oriented, technology-first approach to marketing and sales and embrace a market-segment-specific, use-case-first approach instead. This includes:
All this is a far cry from the technology-first pitches that celebrate the disruptive potential of the next-generation offers, the ones that resonate well with early-adopting technology enthusiasts and visionary business executives, but which are judged “not ready for prime time” by the more pragmatic early majority. Thus, it is that start-up management teams, at a crucial juncture in their incubation, have to transition from the early adopter go-to-market playbook, something they know well and have succeeded at, to a less familiar, but now quite necessary, crossing-the-chasm playbook. This can often require both consulting and counseling, something that has shaped my personal practice for close to three decades and led to the formation of both The Chasm Group and Chasm Institute.
But there is a second problem to address as well, and that is, how to keep covenants with venture investors when going through this transition. These covenants are based on a simple concept. The purpose of any round of venture funding is to finance a stream of work that leads to a higher valuation of the company in question. It turns out, increases in valuation are not gradual but come instead when some important valuation factor has changed state. Classic factors include:
Any given round of funding is expected to change the state of one or more of these risks such that a new investor would value the company very differently from the current valuation. The Traction Gap provides a playbook for how to operationalize this idea.
Specifically, The Traction Gap calls out five valuation factors that drive venture valuation change. They are:
The point of all this is that, in the thrash and crash of chasms and pivots, it is easy to lose sight of these valuation inflection points and focus instead on whatever fire is burning today. Unchecked, this will lead to breaking the underlying covenant with the venture investors, from which no good can come. The whole purpose of the Traction Gap playbook is to avoid this outcome.
What The Traction Gap and Crossing the Chasm have in common is that they are both playbooks based on frameworks that predict outcomes at a time when there is not enough data as yet to know for sure.
The key to early stage success is to act before you know, and then course-correct rapidly thereafter. Good frameworks provide a platform for so doing. They do not replace an entrepreneurial team’s courage and imagination, but they do get it off to a good start.
Going forward, good frameworks continue to contribute to early stage success by:
In sum, the goal of both The Traction Gap and Crossing the Chasm is to accelerate decision-making early-stage investments by cutting through a lot of the noise and eliminating a lot of the hesitation. These frameworks may not always give the right answer, but they give an answer, one that can be acted on effectively, and then course-corrected along the way.
To learn about the Traction Gap, I encourage you to explore, “Traversing the Traction Gap”. To refresh your memory regarding the Chasm, now in its third edition, I invite you to read, “Crossing the Chasm”.
That’s what I think. What do you think?
Want more? Visit www.wildcat.vc and follow us on Twitter, LinkedIn, Facebook & Instagram.
The opinions expressed here represent those of the author and not necessarily the views of Wildcat Venture Partners.
The Traction Gap Meets Crossing the Chasm
Research & References of The Traction Gap Meets Crossing the Chasm|A&C Accounting And Tax Services
Source
0 Comments