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Traction Creates Opportunity
One phrase that I often say is that “traction creates opportunity”. We were talking about this today and realized that I’ve never written a blog post on the topic, although I’ve said it countless times over the years. So here we go.
Early stage companies often debate what they ought to be prioritizing in the early days. Do you focus on team? Do you focus on learning? Do you try to grow as fast as possible?
Early stage investors ask themselves a similar question. What do you focus on as an investor? Proven founders? Huge TAM? Painful problem? Fast growth?
Traction is always a hotly debated attribute for founders and investors. It comes in and out of favor. Sometimes, the idea that growth solves all (or most) problems is widely accepted as the startup north star. Other times, growth at all costs is touted as the root of all evil.
Personally, it’s obvious that traction is a necessary, but not sufficient condition for startup success. Every time a founder tells me that they are not focused on traction, I pause for a second to really pressure-test that belief. It may be true. But it is certainly not going to be true for very long. At some point, all the non-traction work you do should translate into traction. And I see far more companies that put off focusing on traction for too long than I see companies that break because of growing at all costs.
The beautiful thing about traction is that it creates new opportunities. A company that has grown revenue or users by XXX% isn’t valuable just because it’s bigger, but because that traction has unlocked other things that make the business more valuable as well. For example:
Traction creates more traction.
If your product is good, more people talk about it and there is more social proof in the market for the effect of the WoM to multiply. PR or partnership opportunities that may not have been available at one stage can become much more accessible once you are bigger and better known. Partners who wouldn’t return your calls when you were smaller are now reaching out to talk to you to explore how they might be able to work with you. At least for a while, traction tends to build on itself even if you are doing a lot of things wrong.
Traction can lead to better economics and better products.
The most simplistic is just economies of scale. You can negotiate better rates with suppliers or partners. You can get better payment terms. As you have more traction, you can also start to justify capital expenditures that will pay off down the road. As you have more traction, you can justify developing new product lines or new SKUs. This may allow you to monetize your customers better by improving retention and increasing the ROI on your marketing spend. As you have traction, you might also have more data that can lead to better informed product decisions or more powerful automation in the product.
Traction can lead you towards an expanded TAM.
This is something VC’s like me tend to miss. There are many companies that went after huge markets but failed to get any traction. There are also many companies that went after seemingly niche markets but got traction and were able to expand their TAM. One way to expand one’s TAM is to expand your offering to adjacent market opportunities, much like AirBnB starting with individual rooms and expanding to short term rentals and then experiences. A slightly different example is when a company’s success in gaining traction and evangelizing the market opportunity causes the market to grow substantially. Draftkings and Hubspot are examples of this.
Traction creates opportunities to level-up your team.
Some star players will only realistically join a company with extraordinary traction. Also, some domain experts just don’t add much value when a company is early in the market, but can create tremendous value for companies that have a meaningful market presence.
Traction creates opportunity just because of luck.
There is so much in business that is unexpected. You never know when a major event creates an earthquake in a market and suddenly creates massive advantages for certain kinds of companies. As devastating as the Covid pandemic has been, some companies have significantly benefited from the new environment. But most of these companies were ones that had some level of traction already, even if that traction was won over a long period of grinding out small wins over many years. Luck can happen, but you need to be in the mix to be in contention for it.
Now, the thing about opportunity is that it is not without pitfalls. As traction creates opportunity, it also creates greater complexity and can be a strain on cash flow. Founders should be humble when they have stumbled upon a business that has extraordinary traction, because while the most important thing may be in place, there are now many more things that could possibly go wrong. But that’s exactly the kind of problem you want to have as a founder. It’s also the kind of environment you’d want to be in as a team member, because as traction creates opportunity for the company, that also means opportunity for you.