EP68: Which Comes First, Traction or Scale?

 

Our Market Dominance Guys, Chris Beall and Corey Frank, continue their discussion about churn and its various causes. Today’s topic is about how a company’s growth is managed. Are the guiding forces going after traction first? Or are they jumping right into how to scale before they have worked out their product’s kinks? Chris and Corey talk about the tragedy of designing for scale before you have traction. As Chris will tell you, it’s a fool’s errand. If you have no traction, no conversations with your buyers, then you’re not going to learn anything about what your customers need or about why they may not be coming back. Once again, market dominance is achieved when you investigate your churn! And that’s done with conversations.

Today’s podcast winds up with a question of “Who’s in charge here?” when it comes to how to steer a company toward success. Is it the investors you’ve taken money from, who may be pressuring you to scale quickly? Or is it your customers, who, if asked, will tell you what they do or don’t like about your product or service, guiding you toward what you should do to keep them renewing? Listen in to what Chris and Corey think about this important matter on today’s Market Dominance Guys’ episode, “Which Comes First? Traction or Scale?”

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The complete transcript of this episode is below:

Corey Frank (01:54):

How I think a lot of folks start in this profession of sales, right? We're talking about churn and SaaS, and there's certainly churn in your team. And what do you see when the landscape today, particularly all the implementations ConnectAndSell as part of? I would imagine it saves a lot of careers though too. When you have the right tech stack with the sales rep, who maybe again is in this existential crisis, that tech stack can revitalize or reclarify, re-energize that what they thought sales was doesn't necessarily have to be what sales will be. And they have a sense of promise of future potential, of hope again, I would imagine in quite a few instances, true?

Chris Beall (02:41):

ConnectAndSell in particular, I think has a place in that hope equation, in that if you didn't really recognize that your issues had to do with the fact that you just weren't talking to enough people to even have a shot. It's like if somebody put you to the task of driving a car up a hill, because you've got to deliver something, or trucks, say you're an Amazon Prime delivery person, which I believe is now one out of three Americans. So, your job is to get this truck up the hill. Well, if the truck has the horsepower and it has the gearing and it has tires on it and it has a steering wheel, it's connected through some coupling mechanism to the front wheel so that they'll still both point the same direction at the same time, this seems really straightforward.

Chris Beall (03:28):

It may be that the hill is steep or windy. It could be like the hill that led up to the geodesic dome I used to live in up in the Santa Cruz mountains where people would visit us once and never come back. That was pretty common. We had very few dinner parties after a certain point. It's like, "We're never visiting your house again."

Chris Beall (03:46):

"Why?" "Because you can't see where you're going on that hill and there's a cliff." "Okay, got it." I don't see the cliff anymore. But if that's your job, and your boss says, "Go do it." And then the problem is that there's something on the hill, say a little skiff of snow or a little wetness or a little oil or whatever, that friction issue in this case, that lack of friction issue is going to manifest itself as 1,000 things you're going to try, none of which are going to work, because unless you have enough fundamental friction between the tires and the hill, it doesn't matter what else you do. And I think in sales, the role technology can play is to reduce the friction, or to provide enough traction, enough grip between the rep and the market, that the rep can start to do their job, they can drive up that hill for the first time.

Chris Beall (04:41):

And before then they don't realize they were doing 100 things, but they didn't really have a shot at doing their job, which begins in the conversation. It doesn't begin in the research. It doesn't begin in the strategy, reps shouldn't be handling company strategy anyway. Why we give company strategy to reps is one of the great mysteries of my life, but people still do it. But by the way, the reason we give company strategy to reps is there's no consequence since they're not going to talk to anybody anyway. So it's a fine thing to delegate since there's so little traction between those tires in the road, that doesn't really matter.

Corey Frank (05:20):

Yeah it's true. Well, let's also clarify that most organizations don't understand, or maybe haven't had the pain enough that the list is your ultimate strategy. I can strategize product market fit, I can have great product research, I can have the best engineers, I can have the full feature set, great UI, award-winning UX, everything, but if I leave that to chance to my reps to, "Just go in the market, you'll find some buyers out there." That's probably where most are, correct? From that approach when you talk about strategy and leaving it to chance.

Chris Beall (05:59):

It is. And when it's left to chance, when you don't have engagement, real engagement, where you have traction, and it's like you're building a business. In all businesses, you should seek traction before you seek scale, always.

Corey Frank (06:14):

Seek traction [crosstalk 00:06:15].

Chris Beall (06:15):

Dreaming about scale before you have traction is a fundamental mistake in designing a business, because the big question is likely to be, what does it take to get traction? Not, what would it take if I had traction to get scale? And I've been through this argument with people for 40 years, and say, "Well, what you're doing doesn't scale. Well, what I'm doing is getting traction now because of without traction, thoughts of scale are pointless. If you think that I'm too dumb to realize that there's a point where we now have traction, and by the way, flowing cash coming into the company in excess of our overhead, and we could redesign around scale, if you don't think we're going to do that, you're wrong."

Chris Beall (07:01):

But designing for scale before you have traction is a fool's errand. And we see this in SaaS companies every day, most are designed for scale and they fail before they get traction.

Corey Frank (07:13):

Mm-hmm (affirmative).

Chris Beall (07:15):

It's the most fundamental quality of business. If you have no traction, for one thing, you're going to die, for another thing, you're not going to learn anything about what your customers really need, you're going to live in a fantasy land of your own making. You're going to find yourself having internal meetings about why your customers are not coming back, right? Internal meetings on churn are a joke. Just talk to your customers, the ones that left and find out why they left. And then after the fact categorize those, and whichever category has got the most in it, that's probably the one you should address, right? The data, the conversations will tell you the answer, and your internal discussions are probably not going to help very much. Don't do the schema in advance, have the conversations first, do the schema later, this by the way, is the same rule, conversations are attraction, schema is scale.

Corey Frank (08:03):

But is that a new phenomenon over the last unicorn era or is it a better remnant for quite a while? Is it exponentially connected? Is there correlation or causation because of the venture money that's poured into the marketplace about designing, especially these SaaS companies for a scale versus traction, would you say?

Chris Beall (08:27):

I think it's an investor-driven phenomenon, has been for quite a while. That is not a very informed opinion because I started doing companies myself in 1983 with Silicon Valley venture money, even though I was living in Boulder, Colorado. And this argument came up very quickly. So first product that I built with another guy, we built a bunch of different things. We had a relational database built from scratch, and I do mean a relational database, DVMS, where it was the pre-Oracle version of this stuff, quite fast. And we had to decide was that going to be our product, while we had this MRP thing, now you call it ERP. We decided to go that route, but was it okay to specialize into flow manufacturing instead of all manufacturing? Well, we decided for traction reasons it was because flow manufacturers, folks who put stuff in one end of a... Instead of a production line, they've got a trough, those folks who worked with tanker cars full of stuff, they were underserved.

Chris Beall (09:27):

And so we went down that road. And our venture capitalists, at one point in about 1986 said, "We don't see how this scales. So what we want you to do is shrink wrap it, put it on these new things called PCs, and we'll pump a bunch of money and you can sell it to little companies." Little companies didn't need what we had. It was just a top-down view where scale was given priority over traction. And we took what I think would have been the next SAP perhaps, you never know, we might've failed at it, right? But it certainly had a shot. We had big customers. We had lots of very happy customers who were getting something they couldn't get any other way. They were paying us a lot of money, but that desire for not just scale, but scale now, overwhelmed. Now look at SAP, SAP is a company that fundamentally you would say couldn't scale, because every implementation was effectively custom. The software standard, but the implementation was custom.

Chris Beall (10:27):

But they found a way to scale in the US. They stumbled on it a little bit, but they embraced it in the '90s, which was to let Anderson Consulting take them into the market. They gave up a certain amount of revenue, but they got scale another way and still preserved the very fundamental qualities of an SAP offering, which is, it's going to work in your company because somebody is going to fit it to your company. You may pay the consultant more than you pay the software guy, but the software companies can end up being capable of creating the richest man in Europe. So, I think that people get confused and it brings up this question of patience. It's extremely rare to make a great business, in fact it's almost unheard of to make a great actual business in less than 10 years. This is rare. And yet the, the lifetime of most venture funds is 10 years.

Corey Frank (11:23):

Mm-hmm (affirmative).

Chris Beall (11:25):

So, if you take money from a venture capitalist five years into their fund, yeah they're going to stick with you after those five years, but the level of patience is going to be... Shall we say their level of patience or their kind of patience is going to be distinct from the patients the market might have with you. It may well be that you need to hang around longer and solve more problems with more customers in order to really figure it out. And that's the market's patience, the market continue to keep you in business, but unfortunately you gave up control to somebody whose timeline is different from yours. And they're looking for 10X to 100X and you aren't it yet. And so, you made a deal you didn't think that you had made. And that one I think ends up being, often I think tragic, not in that people aren't going in eyes open, but there are some really good solutions to some serious problems that have been thrown into the ash heap of history and they're left to be rediscovered.

Chris Beall (12:25):

I talked to a CEO today of a company who's basically doing a superb job. This company is building something that I happen to be involved in, building something similar in 2008. I think it's wonderful that they're doing this now, but the thing probably could have been kept going in 2008, it's just the venture guys get impatient and they wanted a consumer product.

Corey Frank (12:48):

Sure.

Chris Beall (12:49):

Well asking me to do a consumer product is totally idiotic, not because a consumer product is not a great idea, they're great ideas when done well, but because I'm an idiot when it comes to consumerism. I mean, I suck as a consumer.

Corey Frank (13:03):

You could even run a restaurant.

Chris Beall (13:05):

Yeah. Restaurant, thank God, I understand food. That I get. I get food and I get service. Those things I could have done all right, it just wasn't my adventure. But I do think these things all go together, the traction and patience and solving real problems, and then somehow making the money equation work, and then the question of churn and whether it's good or bad churn, and the whole product, this stuff all goes together. And when somebody complains about a company, that it has too many moving parts... I remember when I left Requisite Technology, I was asked to leave, I believe because and given that it followed the next day at 5:30 in the morning, because I had made the strong suggestion that I should be the CEO and that I had a plan.

Chris Beall (14:27):

And I thought my plan was pretty good. And they thought a better plan was that I would clean out my desk that day. So, I-

Corey Frank (14:43):

Just a difference of opinion. Yes, right.

Chris Beall (14:45):

Yeah, it was a difference of opinion. And their opinion obviously counted more than mine since this is just how this stuff works. They were on the board, and the CEO by the way, who put the note on my coffee cup that said, "Chris, see me," Lou is still a very close personal friend. So, it does show that you don't have to take these things personally. In fact, I still really appreciate what he did for me and how he did it. But when I look back on that situation and think, "Okay, what happened next?" Well, they got a new CEO in there eventually. It took a while, but they got somebody in there. And he called me up the second day on the job and said, "Chris, this thing's incomprehensible, that you built here. It's got so many moving parts. I can't understand how they go together." And I went and had lunch with them and drew some pictures on napkins and stuff like that, and offered my help.

Chris Beall (15:42):

And it turned out, I think to be too hard to figure out. But my point is, the moving parts are already there, they're built into the world as we find it. There isn't a situation in business that's simple, that everyone that's of any value has all these dimensions, that they all have a money dimension. Your overhead is that racehorse that eats while you sleep. It will break you eventually unless you can figure out how to make the cash equation work. And the cash equation runs off the gross profit flow in some way, or off a funding flow in some way, and you've got to figure that out. And there is the whole product problem, it's all there.

Corey Frank (16:26):

Over capitalization, we can talk about this here because it's a natural trajectory here. Over capitalization in business, how much harm does that do to CEOs and managers versus what you're saying, which is, "I got to learn to live within my means. I got to learn to live lean. If I have a company that's seven, eight, nine, 10 years, that may had been through a few cycles versus if I continually go from series A to series B to series C, I never really have that tight cash crunch crisis, three in the morning, can't sleep because how do I feed this race horse?" And maybe talk a little bit about your opinions on that, because I think that... I have a good friend, I think we said that many times, that Tim Crown, chairman of Insight, him and his brother started it. And he always said, "The best ideas for me come when I'm around porcelain." As a CEO, talk about existential crisis, he always said, "The best ideas and the best solutions to my problems come when I'm hanging around porcelain in the shower, brushing my teeth, shaving in the toilet, wherever it is."

Corey Frank (17:38):

And is capital sometimes too easy to get? Just because you can get it, should you? Because you miss out on really trying to figure out how these problems can be solved in more creative ways versus just adding more capital.

Chris Beall (17:53):

I think too much capital is the biggest problem, at least in tech. There's, always more money that wants deals, and there are smart things to do with it at that instant. And it's also provided in these chunks, these big chunks. And it's because as Matt Melymuka over at PeakSpan says, "These funds have got too much money and too few partners. And so, they got to seek unicorns. They've got to seek that huge exit. And they're going to sacrifice lots of good companies in order to do it." It's not intentional. There's no bad will involved in any of this stuff, it's just math. Like so many of the bad things in life, it's like viruses are just math. They just are. And I don't know, if somebody thinks the virus isn't math, I can have a private conversation with them about the nature of viruses and math, but I guarantee you a virus is an inevitable piece of math based on how cells reproduce and that's just the way it is.

Chris Beall (18:53):

So, the fact is there's money over concentrated or over piled up in the hands of a smaller number of money managers who call themselves venture capitalists and growth equity guys. And it's because if you have money in, say you're a pension fund or whatever, who are you going to put it with? The one who had the big exits and big successes in their previous funds or not? It may be pure superstition. After all, if you just roll dice or flip coins, half of them are going to be better than the other half. And investing in the half that are better by luck is a bad idea, but no worse than idea than investing at random, except they'll come in at a higher price, which they take out of your head. I think the problem with money is actually not the quantity of it, the problem is that it shifts the customer from being the customer who gets economic value from actually using your product.

Chris Beall (19:48):

And this is B2B, again, I've told you, I know nothing about consumers. Literally I know nothing. I don't know that that glass I'm drinking that Macallan 12 out of it is the wrong glass. It is not. That's not me. I know that I have a fondness for the Macallan 12 and I can afford it and that's about it. So that's the level of sophistication that this consumer goes for. But in B2B, I've been around a little bit, and I know a little bit about how it works. And what happens in B2B is your customer has fundamentally got two qualities that you have to take into account. One is that the buying person or committee, but the buying person in particular, is afraid. And we've talked about this at length on Market Dominance Guys. They're afraid, they're cautious, they're nervous. Say it however you want, there are consequences to a bad buy for a business that are not there in the case of a bad buy for yourself as a consumer.

Corey Frank (20:49):

Mm-hmm (affirmative).

Chris Beall (20:50):

And that's part of it. The second is, businesses vary in more interesting and important ways regarding a product helping them, than individuals do. Individuals are bound tightly by biology, and relatively tightly by culture by the society that they live in. And then somewhat tightly by demographics, how do they fit within that society. And so, in consumer-oriented businesses, we can segment, and when we find a hit, we double down on the hit. That's the rule for consumer-oriented businesses. You segment, you micro segment, you find a hit, you'd strike a cord, boom, go, be prepared to make more of that and market the living daylights out of it. It's not how it works in B2B, because our names for the different kinds of companies and different kinds of roles and different kinds of problems they have, don't map very cleanly onto the actual companies and their variety and the actual kinds of businesses they're in, and the actual roles. Companies are not constrained by biology. It's always the wild West.

Chris Beall (21:57):

And so, when you go to solve a problem for a company, you have to be prepared to do more different things other than simply say, "Here's the product." And those different things are opportunities to learn what might be the future product, what might be the ancillary services, what might be the partnerships that would help, and where to say no. All of these things are the things that you must practice every day when you're evolving and nurturing a B2B company. You're always paying attention to the stuff. The intelligence that comes back from your interaction with customers tells you what not to do, guides you toward what to do, and basically also freaks you out about what you might be able to do, both positively and negatively.

Chris Beall (22:46):

And guess what? None of that stuff makes any difference to your investors because they weren't in the thesis when they invested. So when you take too much money, your investor becomes your customer. And here's how you can tell you have a serious problem in a company, serious problem, when you spend a whole day, once a month, six weeks or a quarter or whatever, preparing for a board meeting, and it's an investor board. Your investor board is not going to benefit sufficiently from that extra bunch of preparation compared to just sitting down with them and telling them what's going on.

Corey Frank (23:25):

Yeah.

Chris Beall (23:26):

It just are. So you're putting on a show for somebody. Well, why are you putting on the show? Because you want that next round of financing? That's why. And that next round of financing becomes your next deal. So you go from a company that might have 100 deals or 1,000 deals or 10,000 deals, and deal with all that variety, get all that intel back and use that intel to make your product better, your services better, decide what to invest in and what not to invest in, and what kind of people to hire and what your attitude is going to be towards offering help to your customers, all that stuff, which is where real business is run, and you're going to forget that. And what you're going to do is prepare for the next board meeting because you're putting on a show for somebody.

Corey Frank (24:07):

So true. Yeah, you're dancing with the wrong person at that party, right?

Chris Beall (24:09):

You're tight, you're dancing with their mom, and she's not going to marry you. That's all there is to it. I'm sorry, you're both 17 and you're going to be a little bit clumsy, and next year you'll be 18, and eventually, maybe you'll be able to get married, but dancing with her mom is not going to help you, I hope.

Corey Frank (24:36):

It's illegal in 16 states too, so it's fine.

Chris Beall (24:38):

Yeah. But it's fascinating that the best of the best, and there's nothing wrong with taking money fundamentally. I mean, I actually believe that putting capital to work in companies is the smartest thing you can do with capital. It's why private equity is such a big business, but private equity is careful, they tend to be a little later stage. Private equity invests in businesses, venture capital invests in a company, but it really is a combination of an entrepreneur and idea, and their own sense of how that might play out, which is a category that everybody else is investing in. They're very different games. And folks like Matt Melymuka can come, and PeakSpan can come into a world that's like venture capital, but they're bringing a growth equity mindset.

Chris Beall (25:26):

They're saying, "Everybody succeeds. 100% of our investments are going to yield. They're going to yield positive outcomes." That's very different from 5% or 10%. So I really admire folks like that, that are looking at a way to bring capital to bear on good companies and even potentially great companies with a sharp eye to how not to ruin those companies inadvertently through excess capital or by becoming the customer.

Corey Frank (25:58):

Well yet again, Chris, in our hour-or-so conversation, somehow we've made it a point to talk about what it seems that so many of our 60-plus episodes are about. We always get a little bit of rock climbing in there I think somehow. We always talk about capital, we always talk about churn, SaaS, and then we even dosed a little bit of existentialism in there. And maybe what we should do in next episode is we can have a throwback machine where you can grow your hair out, you can have your Jean shorts and we can reminisce, tell the listeners here that, "I have a running tally of how many different positions Chris has maintained and has communicated throughout these episodes." I think we're up to 18 or so. So I'm sure there's a few more, that there's always some good lessons that come from you, either rock climbing or hanging out at the wrong place at the right time. And so, more to come, hopefully with many episodes.

Corey Frank (26:52):

So with that, Chris, it's always been a pleasure chatting with you. And until next time on the Market Dominance Guys, this is Corey Frank and Chris Beall, the sage of sales.