Startups: Chasing the Traction Illusion

Introduction

In my recent interactions with startup founders and CEOs, a common theme emerged: pursuing traction, often indiscriminate and misguided. This approach is prevalent among first-time founders and those with a prolonged background in professional services. It's important to understand that venture capitalists are interested in the quality of traction - it should be scalable, repeatable, align with the Ideal Customer Profile (ICP), require minimal customization, and have pricing that reflects its value. This article explores various traction traps startups fall into, highlighting growth challenges and pricing strategies that can undermine success and capital attraction.

The Illusion of Numbers: User Engagement vs. Quantity

A tech startup might boast millions of users but have low engagement rates. This scenario is like a social media app with high download numbers but limited daily active users. Quality user engagement, usage, and retention are important; otherwise, high churn rates can severely affect valuation. A focus on the ICP is critical to avoid burning cash and churning traction.

Example: A music streaming app may have millions of sign-ups but few regular listeners, indicating low engagement despite high user numbers.

Buying Traction: Throw Money, Discount Heavily

A common trap is trying to buy growth by deploying sales teams and selling at low ASPs, especially to enterprises. For example, a SaaS company might reduce its prices significantly to enter a market, only to find that the margins don’t cover the CAC, requiring further funding and resulting in equity dilution. There is no real path to a product-market fit once a startup gets on this trajectory. If you have high-priced salespeople and sell to the enterprise segment, you must price for value. I have seen several of those startups that price the $50-100K average price for enterprise sales, etc. This is a recipe for running out of gas. Traction must be priced right and proven at par with the value it delivers. Discounted traction is often meaningless.

Example: A cloud storage startup aggressively discounts its services to large corporations, but the revenue doesn't cover the high CAC, leading to a cycle of fundraising and dilution.

The Viral Marketing Fantasy

Quick traction through viral marketing often involves unsustainable pricing strategies. For example, a gaming app might become momentarily popular through a free offering but struggles later with monetization and retaining users accustomed to free services.

Example: An online education platform offers free courses to gain a user base, only to find challenges in converting these users into paying customers.

Vanity Metrics

Startups can be distracted by vanity metrics like downloads or page views, which don't translate to meaningful engagement or revenue. For example, a fitness app may have a high number of downloads but a low average usage per user, indicating low real engagement.

Example: A mobile game shows millions of downloads but has a low percentage of active daily players.

Traction from Customization

In their eagerness to show traction, startups may over-customize their products for specific customers, derailing their roadmap and moving away from their ICP. For example, a B2B software company might start adding features specifically requested by one big client, making the product too niche for its broader market. Companies with these behaviors do not survive long, if they do they assume valuations at par for services companies.

Example: A CRM software startup develops bespoke features for a key customer that is “off ICP”, making the product derail from its product-market fit.

Broad Market Appeal vs. Targeted Strategy

Targeting a broad market can lead startups to underprice their offerings, increasing their burn rate and CAC, and resulting in diluted focus. Although this might generate some cash flow, it typically leads to low-quality traction not backed by investors.

Example: An e-commerce startup tries to appeal to a vast market by undercutting prices, resulting in high sales volumes but low margins and unsustainable growth.

The Holistic Picture

Some of these issues are fixable with effort while others get on the path of irreversibility quickly. Here is a matrix that may help understand where to draw the line, what is correctable, and what may already have been damaged.

Conclusion

My advice to new founders and those who have transitioned from services companies (with an appetite to listen) is that all traction is not the same. There is traction that is high-quality, scalable, and fundable which is superior to achieved by lowering prices, customizing products, selling to non-ICPs, or acquiring via paid channels.

The irony of this is that many startups think they are increasing their odds of getting funded or enhancing valuation, but falling into one of these traps often yields the opposite result. Avoid these traps, lay good foundations, say no to poor quality traction, and have the discipline to execute only on ICPs with minimal customization of the product.