Investors love growth, and therefore so do founders. Growth is oxygen for an early-stage company; it signals to the market the viability of a future that will make people money.
Traction, however, can be fool’s gold. Many founders, knowingly or unknowingly, will pull certain levers to manufacture traction that are bad for the business. This is why it’s important to take a look under the hood. Not all traction helps, and some of it can quietly drag a business backward.
Here are three common early-stage illusions of traction:
1. Selling a bespoke solution: It’s one thing to be opportunistic, but it’s another to masquerade a services company as a software company. When each deal is a dev project, you are not gaining traction; you are a built-to-suit dev shop.
While the nuts and bolts may be serving the market, it’s impossible to build a repeatable, scalable go-to-market motion around “custom.” It feels great when Google is interested, but “if only”… Stop right there. Start-ups are lured by enterprises all the time with “if onlys” because they so badly want to land the big logo.
Trust me, Google and every other legitimate enterprise know what they’re doing. They are asking the same “if only” question of their internal dev team and are having you do the work for them. Sure, you might land one, but there is a solid chance that the specific use case is not as scalable as you think. If you haven’t productized your offering yet, what makes you think the custom approach for the future 500 in the pipeline will do it for you?
2. Putting all your eggs in one big basket: We talked to a company with an impressive $4M in ARR in just six months. The problem? They had one customer! Obviously, a big customer with a recognizable name looks great. One thing start-ups like this don’t have in the enterprise is leverage. These companies employ an army of professional buyers and they negotiate in their best interest. That $4M contract is not as guaranteed as you think it is, and if that one customer is your entrée into the enterprise, you are now up against 12-18 month sales cycles, assuming you have some real enterprise deals in the pipeline… a challenge in its own right.
The one customer example is extreme, but there are plenty of instances of a small cohort of early customers brought in through relationships that provide a significant, if not total, picture of traction. I’m not saying that using relationships to acquire early customers is wrong, even if it’s a big logo. What I am saying is that there is value beyond ARR. What I’m advising is to leverage early adopters to learn how to capture more demand. Deep exploration of the solution’s intrinsic value, implementation gotchas, use cases, messaging, positioning, and even fertile hunting grounds for new customers can be learned from those customers.
3. Only relying on pay-to-play: Buying revenue comes in many shapes and sizes. You might be thinking, “Wait, I have to spend on acquisition, right?” Correct. However, one of the biggest mistakes I’ve seen is paying for revenue without regard for the unit economics of the business and the long-term impact.
Many think of pointing directly at marketing spend, like paid ads, conferences, but where I’ve seen the most egregious examples is in partnerships. I am a strong advocate for partners and partner ecosystems, and I firmly believe it’s the best path to building a scalable GTM model that drives business outcomes. I’ve seen some so-called “partner deals” that aren’t partnerships at all; instead, they’re one-sided acquisition levers that don’t benefit the company beyond showing top-line growth.
The most blatant example is that the partner customer is offered a substantial discount, or an in-perpetuity rev share (for just a referral), while having to pay their own internal sales reps. Let’s unpack this a little and the impact on the business.
- First: Leading with a discount sucks! You’ve already diminished the value of your product. Trust me when I tell you, the prospect does not care that the retail rate is higher than the discount they are receiving… They are going to negotiate further. Does it have its place? Yes, but starting from the discount does have a mental impact.
- Second: Frankly, I’d avoid rev share. Commissions for partners are okay, but it should be limited to the first year of ARR. Think of it as an acquisition channel that bears a cost, but paying for that revenue in perpetuity is a killer on the cost of goods sold by the business. It also does not allow for any real customer acquisition cost payback calculation.
- Value alignment: Partnership should inherently provide value to the customer. That value must be established first before the terms of a partnership enter into the equation. The goal should be 1+1=3 for the customer. The value of that output could easily outweigh any commissions or Sales Performance Incentive Fund Formulas that could be paid. I’ve built plenty of partnerships on value exchange outside of cash. Partnerships that elevate the joint GTM, close deals faster, get access to more deals and get everyone maximizing their own comp, not worrying about selling another thing. Paying your sellers is non-negotiable; paying partners is not always the correct incentive. If it is, make sure the deal is equitable, fits into your CAC payback and COGs model and automate and pay your partners on time!
Not all traction is created equal
When it comes at the cost of clearly defining the product, you’ve already put the company at a disadvantage. That traction is now a custom project, not repeatable or productized. They may be paying you in ARR, but what does that renewal look like? Does the value to that customer translate to the value of the rest of the customers and the market?
Whales are great, the logo looks good, and the dollars tend to be big, but they come at a cost in early-stage companies. The key is to know your unit economics. Don’t let vendors, agencies, or partners be the only people making money, leaving you with a book of unprofitable customers.
Remember: traction is important, but repeatable, profitable traction is gold.
