How to assess market traction of early-stage tech startups

Recently I had lunch with a non-technical friend who was trying to evaluate whether to join a particular early-stage tech startup that had few if any customers, and in particular understand its market traction. Here is the advice I gave. Some of you will undoubtedly be familiar with all the tools and techniques below, but for others, I hope this has some use.

VALUE DYNAMICS

First, determine the “value dynamics” of the company’s product. That is, at what scale the product provides value, and use that to determine if the product is an enterprise play (smaller number of larger deals) or volume play (larger number of smaller deals).

An example of an enterprise play is a Software Tools Automation company I recently was speaking with. Their product automates the job of “tooling engineers” who ensure that developer teams are productive. A typical enterprise might have 10 tooling engineers for 100 developers, which might collectively incur around $2M in headcount expenses per year. In this situation, the vendor could hypothetically offer their solution for $200k per year, and enable a reduction of tooling costs by 90%. This is a tremendous value prop, but it only kicks in at scale, when a company has started to hire tooling engineers, which I’ve been told is maybe 30 or 50 developers. (I could be wrong; never trust it when marketing guys make estimates around engineering resources!) The point is, enterprise plays need longer sales cycles to persuade prospects that their value is worth significant investment. This, in turn, requires looking at a different set of indicators than volume plays.

In contrast, New Relic (where I’ve worked) is a volume play. It provides value at low scale, even for just one developer working on just one app, and it installs in minutes. For customers, it’s a low investment and low risk, yet high value. As a result, New Relic has won thousands of customers. Not that New Relic can’t be used within large enterprises and win large deals — it is and it does — but (as explained in its S1) its value dynamics allow it to pursue a “land and expand” strategy: win many initial beachheads, and expand from there to win progressively larger deals.

Once you understand the value dynamics of an early stage startup, it’s time to understand its market traction.

VOLUME PLAYS

For volume plays, there are a number of online ways to triangulate in on market traction. I’m listed these by which tools I see as leading indicators of adoption, and which as lagging indicators.

Hacker News
Used to discuss new products and technologies. Plug in the name of the company/product/open source project, and gain a sense of the sentiment of the product. Developers have good BS detectors, so if you see positive comments here, it’s a generally a good signal.

Meetup
A good measure of passion around a product or open source project. Generally, if something’s gotten good reviews on Hacker News, it may help drive Meetup attendance by folks that want to learn more.

GitHub
Used to distribute open source code. Plugin the name of the open source project, and note the number of commits (updates to the code), contributors (people who’ve made updates), watches, and stars (favorites), and date of last commit. Watches and stars don’t matter as much as commits and contributors, since the latter means that people see enough value in the technology to invest time learning about and contributing to it. It’s also worth looking at the age of the project, as measured by the first commit to the repository; if you can find a project that has many commits/followers/etc. relative to its age (like Docker) that’s awesome. Conversely, if the last commit was made a while ago, that’s a bad sign.

StackOverflow
Used to answer “how to solve technical problem X?”. Don’t get put off by this if you’re a nontechnical candidate. Just plug in the name of the company, product, or their open source project, and look at the number of questions asked, and for each, the number of upvotes for leading questions.

Social media followers
Find the corresponding social media accounts for the company, product and/or open source technology, and track the number of followers. Track all the usual suspects: Facebook, Twitter, Instagram, SlideShare, YouTube, and of course LinkedIn. Maybe Snapchat and Pinterest, too. And whatever else appears in the ever-changing social landscape. Compare these to the corresponding accounts for directly competitive, or substitute technologies.

Positionly
Positionly can track search engine rankings of a company/product/open source project to those of its competitors and substitutes. There are probably alternatives to Positionly that you can use.

Google search
As old as Google web search is, it’s not a bad idea to compare the number of Google search results for a company/product/open source technology to its competitors and substitutes. It’s a relatively lagging indicator, however, since PageRank depends in part on the number of inbound links that websites have made to a page.

Indeed Jobtrends
Tracks the number of job openings for a particular company/product/open source project. Since this is a rough measure of usage, this is a good proxy for budgeted spend. Usually, this happens after enough individual techies (developers, sysadmins, etc.) persuade their managers to hire people with skills in a particular open source technology.

Now, if the name of the company/product/open source project is hard to search for on the above sites — say it’s a common word, or a misspelling of a common word — that’s a bad sign. It’ll make it harder for the company to run online advertising campaigns, be found at conferences, harder to be found by job seekers, and probably adds a host of trademark issues. Sure a rebrand might be possible, but that delays time to market traction and revenue. You also have to wonder why the founders didn’t think about this beforehand.

ENTERPRISE PLAYS

For early-stage enterprise plays, you can try the above techniques, but they may not work since the company may have decided to skip grassroots promotion, instead pursuing sales cycles with larger enterprises. If so, look instead to the following:

Inbound inquiries
One company I recent spoke with has no problems selling their software, since customers are beating a path to their door. They’re getting numerous inbound inquiries (emails, calls, etc.), and their sales efforts are around converting those inquiries into subscriptions as quickly as possible. A classic land grab.

Customer wins
While a lagging indicator of traction, these are the ultimate measure of market traction. Ask for deal characteristics: revenue, number of units, discount amount, days to close, was this a land or expand? The bigger the deal, the lower the discount, the fewer days to close, the better. Expansion deals are great, since they mean a customer is happy with their initial purchase.

Annual subscription renewals
The gold standard of market traction are customers that have used the product for over a year and have signed up for more. Obviously very lagging, but a very clear signal.

—

So, there’s my take on assessing the traction of early-stage startups. I welcome your thoughts and contributions.