Questions

When starting a social networking startup, what are great KPI analytics that would draw attention from investors to be interested in funding it?

As I'm moving forward with building a social networking startup, I'm very curious about what KPI's an Angel or VC would be interested in prior to investing money. I understand that Users, Retention Rate, Growth Rate, User Downloads, DAU, and MAU are great indicators, am I missing anything critical? Also, what are some great KPI numbers that I should be aiming for to show good traction and retention?

3answers

Our product stalled for 4 years by getting this wrong and it wasn't until the founding CEO of Netflix showed me how to set proper KPIs that we finally started making gains on optimizing our product.

Based on your interest in angel investors, I assume this is an early stage startup and most social networks don't try to monetize very early. If you're not trying to drive ads, subscriptions or other revenue yet, your KPIs (key performance indicators) will primarily be:

- week-over-week growth rate
- engagement (frequency, recency, stickiness)
- retention
- referral rate

Y Combinator suggests that a 5-7% week over week growth rate is good, while 10% is very strong. If all of your growth is organic, any of these numbers would be interesting to most angels after about 6+ consecutive weeks, especially if you can explain how you have systematically driven those numbers up using data. If it's all paid acquisition, your cost per acquisition, engagement, and retention will be the numbers they focus on.

Engagement should be a factor of frequency, recency, and potentially, time spent on site. The level of engagement that you want would depend a lot on what kind of social network you are and how people are engaging. If you increase logins by forcing people to check messages that they ultimately won't find valuable, they'll quickly lose interest in your network. It's possible that the ideal engagement rate is determined by seeing what level of engagement results in the best retention and referral rates.

When you roll out monetization, you'll add new KPIs. What they are will depend on your business model. If you are ad-supported, some of your KPIs might be month-over-month growth of ad impressions, incremental improvement to click rate or your effective revenue per thousand impressions. If you are subscriber-supported, you will measure other metrics entirely.

It's important to know what the final, most important KPIs are. At my streaming music company, our most important metric was the average number of songs completed per user per month. We made the obvious observation that, if we got more people to turn on music in the first place, we would increase this number. We implemented our most popular channels as options on the homepage instead of making people navigate to find their favorite channel. Our activation of new users skyrocketed but nearly all of them selected a broad genre channel like Rock instead of the niche Shoegaze channel they would really love, and our engagement and retention plummeted. So, the metric we were trying to improve through our test did, in fact, improve, but the health of our business declined further down the funnel.

You gotta get these right. Let me know if you want to talk through your situation.


Answered a year ago

Good question. I've worked with many different startups that struggle with this same question and I sat on the advisory board of a (now defunct) social media startup that was focused on sharing photos of high school sports events that sadly never actually solved this exact question properly.

While I think that you have listed all of the relevant metrics that most financial analysts and investors use to analyze social networks like Facebook and Twitter above, I think that you are likely going about this process the wrong way.

You need to define:

1) What is the mission statement and purpose of your company?

and

2) How is your company going to generate revenue?

You need to define these two items on day 1, -- though in many cases they will change over time (Apple used to be a computer company -- now they primarily sell phones!). Once you've got both of these answers crystal clear, you can determine what metrics that you believe you should be measured against and what your definition of success would be. It will be different depending on the specific goals of your company. For example, I suspect that one of the early metrics for Instagram was the number of photos shared on the site per day or per month. The social media site that I was involved with never figured out the answer to #2 above -- and though they went through multiple rounds of funding, they were not able to succeed because they didn't have any real business model except "getting acquired". Ultimately, later stage investors balked at investing in a pre-revenue company that had a high valuation and no real business model.

You should create a "benchmark" of what you think your company's most important metric shouldpitchn 6 months or one year and then manage and measure to try and achieve that goal. Though it is early days, I would also create a financial metric that shows some kind of progress on the revenue front -- this is important because it shows that there is a real value to the service that someone (advertisers, users) is willing to pay for. Ultimately, all companies are valued based on the expectation of future profits, and other metrics, such as MAU, DAU, growth rate, etc. are really indicators that analysts and investors use to try and extrapolate what those future profits will be.

From there, you need to execute, execute, execute. You should be executing against your own plan and your own measure of success. If you do that successfully for a few months and have a good vision and demonstrated traction then you can go share your story with investors. Your last consideration in launching your business should be how it will look to potential investors; you should NOT be executing to merely get funded by a VC, you should be working to build a viable and self sustaining business in the long run. Far too many entrepreneurs brainwash themselves into thinking that "getting funded" is the ultimate goal -- and make "short term smart, long term stupid" decisions because of that thinking.

Finding investors to fund your company is like finding a marriage partner. You'll likely have to pitch to a lot of folks before you find the one that a) understands your vision b) believes you are the right person to execute over the long term and c) agrees with you on the valuation and terms that you are raising money at. If you have a compelling business model and demonstrated traction it makes parts a) and b) easier in your pitch with potential investors.

If you have more questions or want to discuss your specific situation, I'd happy to chat more about this over the phone. Please request a call below.


Answered a year ago

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