What you can learn about “traction” from Superhuman (Oversubscribed Weekly #28)

July 2, 2019 by

Mike here.

This week I’m going to dive into SuperHuman’s recent $33M Series B round, tell you why a $260M valuation is justified despite only 15,000 customers and ~$5M in annual revenue, and what early stage startups can learn from this round in terms of how to talk about “traction.”

But first, last week I gave a talk at AWS Startup Day on raising seed rounds. It’s a 1-hour talk (40 min of me talking + 20 min of Q&A) that essentially serves as the cliff notes version of our book. Watch it below:

Talking about Superhuman’s round
For those who don’t know, Superhuman is a Gmail competitor that has gained a cult following from folks who swear by it, pay $30/m, and say it helps them save hours per week on processing emails.

They raised $33M from Andreesen Horowitz last week, giving them a valuation of ~$260M. 

Folks who are used to valuing more mature businesses think it was grossly overvalued, and on the surface, they’re right. 

However, I frequently tell founders that at the seed stage (and in this case the Series B stage), any revenue you have rounds down to zero compared to what VCs will want you to achieve in the future. Instead, progress (AKA traction) is more about what you’ve figured out about your business (in other words, what you’ve de-risked). In SuperHuman’s case, there’s little difference between 7.5K customers, 15K customers, and 30K customers (or $2.5M, $5M, and $10M revenue). All of those numbers round down to zero compared to the vision they’re chasing.

I’d bet that SuperHuman didn’t talk about their current revenue numbers in their pitch. The truth is that what they’ve figured out is far more valuable from a traction perspective than $5M in revenue, or even $50M in revenue. If SuperHuman is aiming to compete with Gmail, generating revenue is not the biggest risk. The biggest risk is whether or not they could build a product so good that people will change one of their most deeply engrained habits – email. 

Remember, the heart of a fundraising narrative is (1) what you’ve figured out so far (AKA what you’ve de-risked), (2) what the next milestone is (AKA what’s the new biggest risk and how are you solving for it), and (3) once you’ve achieved the next milestone, what’s possible in the future?

For Superhuman, it may have gone a little like this: 
1. We’ve found such strong product-market fit that 15K people have not only switched to us from Gmail, but they’re even willing to pay $30/m for a service that has forever been free.

2. Next, we need to figure out how to go from our ideal customers adopting Superhuman individually (tech people who respond to a lot of emails) to getting their employers to adopt Superhuman as their organization’s email tool.

3. Once we figure out how to sell B2B through target customer, we can expand beyond early adopters and aggressively take market share from Gmail and Outlook.

Note that in that little narrative, I used some numbers, but only to justify the qualitative statements I was making. With a narrative like this (and some more math behind the scenes to back things up), it’s not surprising to me that they could raise at such a high valuation. Essentially, this narrative prompts an investor to think, “if they are right about what they’re saying, they could become as ubiquitous as Gmail.” And if that’s true, then a $260M valuation is a bargain.

So what does this mean for you? 

When thinking about your own progress or traction, avoid the temptations to jump right into vanity metrics like revenue or user count. At the early stages, vanity metrics round down to zero. Being able to say, “we have customers that can’t live without our product” is better than any vanity metric. Think critically about what you’re trying to achieve long-term, what you’ve figured out, what you need to figure out next, and how that puts you on your path to your long term vision. Only once you’ve established that narrative should you dive into the numbers required to back up your claims. 

This is important to think about before you’re fundraising as well. If you plan to raise a round in 3-6 months, you should be operating the business in a way that gets you to these de-risking milestones as quickly as possible. For Superhuman, that was being able to demonstrate extremely strong product-market fit with a relatively small group of customers who switched from Gmail and were saving time on email with Superhuman? This can be a great conversation to have with investors before you’re fundraising – asking them what they think the biggest risk your startup faces is really helpful to figuring out what you should be aggressively de-risking to put yourself in a good position to raise a round.

Have a good 4th of July! 

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