By Alexei Oreskovic
SAN FRANCISCO, Nov 26 (Reuters) – A growing group of
social and mobile Web services are poised to become the next
Facebook Inc. Just ask them.
Online startups with eye-popping statistics that purport to
show their popularity have captivated the attention of the media
and investors. Companies boast of everything from skyrocketing
Web page views to user sign-ups to shared digital photos as
measures of their success.
But unlike the financial numbers used to evaluate more
mature companies, the so-called “vanity metrics” now in vogue
are largely self-reported and often vague enough to defy
definition. With valuations for high-flying startups hitting
nosebleed levels, some hear echoes of the obsession with
“eyeballs,” or raw numbers of website visitors, that defined the
dot-com boom of the late 1990s but quickly proved to be an
illusory measure of value.
“I wouldn’t buy a pizzeria just because the phone is ringing
off the hook,” David Cowan, a partner at Bessemer Venture
Partners, said in a telephone interview. “First, I have to
understand who is calling, why, from where and can we really
sell them pizza.
“People have to be careful about the extent to which they
use these metrics as indicators of value,” he said.
The issue came into focus last week when Snapchat, the hot
mobile photo and video messaging startup, announced that its
users send 400 million “snaps” every day just as reports
surfaced that it had turned down a $3 billion acquisition offer
from Facebook.
The $3 billion offer shocked many given that the company,
which lets smartphone users send vanishing pictures to each
other, does not have any revenue. Some also wondered what the
400 million snaps actually referred to, and how they compared to
the amount of photos shared on Facebook.
If a Snapchat user sends the same photo to 10 people, does
Snapchat count it as 10 snaps or one snap, a widely discussed
article asked last week in online publication BuzzFeed.
A Snapchat representative told Reuters by email that the 400
million snaps includes both photos and videos that users
received but did not provider further clarification. The company
said in a tweet last week that 88 percent of snaps are sent to
one recipient.
Many of the self-reported user metrics are “black boxes,”
said Joe Beninato, a Silicon Valley entrepreneur who has founded
and sold several Internet companies.
Of course, 400 million of anything is a big number and a
sign that the company has achieved some level of success, he
said. But he said a single metric alone might not tell the whole
story and could even mask problems, such as a high user churn
rate.
Pinterest, a social media scrapbook service whose last round
of funding valued it at $3.8 billion, is only beginning to
experiment with monetization. The company does not disclose its
total number of users, but recently said that the service has
1.5 million travel-related “Pins” per day. The company, which
declined to comment, does not publicly provide any data about
its total number of users or their activity, though it ranks
among the 50 most-visited websites in the United States,
according to online measurement firm comScore.
Among the most the questionable metrics that are now
commonplace are a company’s number of registered users, which
doesn’t account for duplicate and dormant accounts; a messaging
service’s volume of messages, which could have been sent by
either a very small, or a very large, number of users; and
installations of mobile apps, which includes installations by
customers who did not like a service and quit using it.
Even longstanding Web traffic metrics such as page views and
unique visitors remain surprisingly open to interpretation,
owing to divergent measurement techniques and standards.
The number of “active” users, defined as people who access a
Web service at least once a month, could include automated
software that looks like real users, driving up website page
views and disseminating paid advertising links on social
networks.
“Sometimes these companies don’t take out the ‘bots,’ and if
you take out the bots, then suddenly 40 percent of their traffic
goes away,” said Hans Swildens, the founding partner at Industry
Ventures.
MOM, POP AND BOTS
For Web and mobile startup companies, proving robust growth
in users and time spent with the product is critical to
attracting media coverage, recruiting engineering talent and
securing funding.
“I’ve been in plenty of meetings where people are discussing
what information to release to the press to get the maximum
impact, something that sounds good but doesn’t give away too
much information to competitors,” Eric Ries, who is the author
of the book “The Lean Startup” and has worked at several online
companies, said by phone.
Choosing the right metric to release is a key decision
within Web startups these days, said one public relations
executive who advises Internet companies and asked that his name
not be used.
“There’s a lot of pressure to talk about these type of
figures,” he said. “Many companies are scrambling to help people
understand the scope of their business.”
A good metric is one that a company has confidence will grow
reliably and remain the most relevant snapshot of the product’s
popularity going forward. But he noted that in some cases the
practice has “devolved into this exercise of trying to appear
big when you’re not really big. It’s almost this masquerade
these days.”
Venture capitalists, who typically evaluate hundreds of
startups every year, say they know how to cut through the
superficial metrics to find out how a company is really doing.
VCs look at the ratios of daily users to weekly users and
monthly users to get a feel for how many repeat users a company
has. They strip out growth that comes from unsustainable
practices, such as online services that tap into a user’s list
of contacts to send “spam” messages, and they try to determine
how “viral” a service is by measuring how many of a user’s
friends join.
But with the recent lifting of a long-standing ban on
private company investment solicitation and a proposed
“crowdfunding” rule that would allow mom-and-pop investors to
bet on startup companies, consumer advocates fear less
sophisticated investors could easily be misled.
“It’s a very selective and dressed-up version of the facts,”
Barbara Roper, the director of investor protection at the
Consumer Federation of America, an association of nonprofit
groups based in Washington, referring to the user metrics that
companies provide, said by phone. “There’s no standard of
measurement. There’s no comparability.”
Even experienced investors can make mistakes. Viddy, a
social video app, raised $30 million in funding in 2012 as
investors jostled to get a piece of the company that was at one
point adding more than 1 million new users a day.
“Their user-growth chart didn’t go to a hockey stick, it
went straight up a wall,” an investor in Viddy, who asked to
remain anonymous because he was not authorized to discuss the
situation, said in a phone interview.
What many people didn’t realize at the time, he said, was
that Viddy’s hyper-growth was mainly due to being one of the
first video apps to take advantage of new distribution features
on Facebook, rather than anything unique about the product
itself. When Facebook suddenly tightened that distribution
channel, Viddy’s momentum came to a screeching halt.
Formspring, a social network which at one point was reported
to have “2 billion answers to questions” posted on its website,
shut down in March and was relaunched as Spring.me under a new
management team.
Flud, a mobile news reader, was adding one user every four
seconds shortly after its launch in 2010 – but closed shop in
August.
THE SMELL TEST
Bessemer’s Cowan notes that some metrics really do have
value, pointing to his firm’s decision to invest in professional
social network LinkedIn Corp six years ago.
The fact that many LinkedIn users were inviting their
friends to join the service, and that LinkedIn user profiles
were appearing high up in search results on Google Inc’s
search engine suggested that the service was spreading
in a meaningful way, he said.
The company was in its early days of generating revenue in
2007 – but the real growth potential was reflected in some of
its nonfinancial metrics, Cowan said.
