The value of social has always been reaching consumers in a unique environment where they are deeply engaged and generating a meaningful conversation between those engagers and a brand. To do this well, we have to deeply understand the passions, preferences and interests of the brand’s audience and how these affinities relate to the brand itself.
Major opportunity lies in making sense of the social data created by the billions of consumers who willingly broadcast their affinities and brand connections daily across social channels such as Facebook, Twitter, LinkedIn or Instagram. These social channels account for the planet’s largest and least biased focus group ever created. Affinity data holds the secret to how consumers want to be engaged, leading not only to better social media marketing, but a more engaged consumer across all channels.
A Giant Affirms Affinity
It is in this vein of thinking that Facebook recently launched its Audience Insights tool for advertisers, which was “designed to help marketers learn more about their target audiences.” To see the largest player in social bring forward a product aimed at better harnessing social media audience data is exciting and reaffirms what my company has already found to be true: social data, when harnessed correctly, is the most valuable source for consumer insight across any channel.
So, what can Audience Insights help marketers learn? Some highlights include:
General feedback on Audience Insights seems positive, and shows the hunger for a better understanding of what social data tells brands about their customers.
Facebook Audience Insights is a great first step for brands who want to understand their customers better through social data. Social intelligence tools exist today that allow brands to take an even greater step forward in their social data strategy by adding value in five key areas:
The market is just scratching the surface of using social data for more effective brand advertising within social media and across offline channels. Facebook’s new Audience Insights tool offers a great first step toward this opportunity, but more work needs to be done and platform providers are available today that can help. Look for partners that canshowcase the additional scope, depth, action, competition, and offline application and you’ll be prepared to take advantage of the power social data can bring to your marketing activities.
Grant Parker is the Vice President of Strategic Partnerships at 4C. 4C is powered by over 27 years of university research in big data science and predictive algorithms to help companies understand and use social data and connections. Grant’s previous experience includes positions with Ziff Davis, inPowered, NetShelter Technology Media and Resolution Media. Learn more at http://4cinsights.com/.
Article courtesy of Inside Facebook
Recently, Facebook announced that they will eliminate like gating for Facebook pages on Nov. 5.
Fan gating (or like gating) allows brands to require consumers to become Facebook fans in order to view exclusive content, redeem coupons or enter sweepstakes. In the short term, the move might be a blow to brands that rely on fan gating to grow their audience. But ultimately, the change will encourage brands to focus on strategically growing an engaged, relevant audience. It is a sign that social marketing is evolving past goals like “getting more likes,” and maturing into a practice that is focused on delivering real business value for an unusually low cost.
This is a good thing, we promise.
To ease the transition, we recommend these five tactics for building and leveraging your audience after Facebook sunsets the like-gate.
1. Run social campaigns that encourage —but don’t require — page likes
Facebook campaigns and promotions give brands a significant fan growth boost, even when they don’t require likes. Marketers can still create strong calls to action for why the consumer should become a fan. Plus, lifting the fan gate removes a barrier to entry, enabling more people to see and participate in experiences. You may lose a few likes, but you’ll capture more valuable info, like email addresses.
2. Focus on producing engaging, shareable content
Your true fans don’t need an incentive to like your page, because they’re genuinely interested in what you have to say. Deliver informative, quality content that grabs the attention of consumers and makes them want to become fans. Since Facebook’s reach decline, blasting Facebook posts hyper-frequently is no longer an effective strategy for growing reach and engagement. So you’ll need to emphasize quality and relevancy to get results.
3. Test, test, and test some more
Analyze the days and times when your content gets the most traction, and change your posting habits accordingly. Experiment with a variety of Facebook post types (photos, videos, links), and monitor performance. Put ad spend behind the posts that get plenty of likes and shares. Or try testing content with dark posts before blasting content to your entire fan base.
4. Don’t just rent your audience. Build your own.
Facebook likes are seen as a way to maintain connection with consumers, but with Facebook’s declining reach, marketers need to start owning —not renting—their audience.
Leverage social channels like Facebook to collect emails and marketing opt-ins, and ensure that you can stay connected with consumers in the long-term.
5. Focus on meaningful results.
The success of your Facebook strategy cannot be measured in likes. You need to track and optimize the channel’s contribution to the metrics that matter most to your business: whether it’s website visitors, coupon redemptions, direct sales, email acquisition, or customer loyalty. Invest in the tools and tactics that make a genuine impact.
Article courtesy of Inside Facebook
Despite the hand-wringing that comes with discussing Facebook’s organic reach, a study by AgoraPulse finds that it’s not all doom-and-gloom. There are a few industries and page types — such as personal websites, TV channels and radio stations — that have seen their organic reach remain steady or even grow.
Inside Facebook talked with AgoraPulse Founder and CEO Emeric Ernoult about how organic reach on Facebook isn’t falling off a cliff for everyone, and how smart marketers are moving beyond the reach metric.
Inside Facebook: Do you feel that small businesses and other brands without a major budget should look beyond reach into other metrics?
Emeric Ernoult: I think every business and brand should look at other metrics (like clicks, conversions, revenues) when it comes to measuring the impact of their Facebook marketing. But as it all starts with the audience (how many people will see my content), they get stuck at that reach number and don’t look beyond, especially now that everyone and their brother is convinced that Facebook reach is going to be “0.”
This is a very dangerous approach. First, I still regularly see small business and bigger brands getting a very significant amount of reach for free. Second, when combined with targeting via paid Facebook channels, it can lead to revenue that would make Google look like a rip-off.
As a very basic and simple example, each piece of content we promote on our Facebook page generates at least twice the budget we have invested. The numbers are not huge, but it’s evidence that it can be a good business decision to look beyond free reach to assess the effectiveness of Facebook as a marketing channel.
IF: Of the categories that are growing or steady, what do you think is working best for them?
EE: Well, there’s no magic trick here — most (if not all) of them are about stuff that people care about and are willing to pay attention to (passion brands or products, entertainment, sport, etc.). Facebook is the mirror of our interests in life: we are not going to rave about the latest landing page feature from Hubspot or the latest Facebook contest app from AgoraPulse, but rather about the last episode of Game of Thrones, the latest Harley Davidson we’ve bought (or dream to buy) or the sports team we are cheer-leading for.
For these types of brands, Facebook is a no brainer and success will come easy. For the others, we’ll have to work harder. But this is true on every channel (SEO, AdWords, affiliate marketing, Twitter, etc.)
IF: If you’re a page owner with a $0 ad budget, how much weight should you put into the fluctuations of organic reach?
EE: There’s no such thing as a brand with a $0 ad budget. If you have $0 to invest in promoting your brand or products, whatever business you’re in, you shouldn’t be in business. It may sound a little harsh, but this is the reality. We all have budgets to grow our businesses, whether $100 a month or $100,000,000. It’s just a matter of choosing where to invest these budgets. Facebook may not be the best choice for everyone, but it is a channel to seriously consider. All of our ad money goes into Facebook because they produce much more return than any other channels we’ve used so far. Just do your own testing and figure out what channel works for you.
Here’s a look at the infographic published by AgoraPulse, showing major fluctuations in organic reach by page type for May 2014. Not all page types are illustrated — it’s just a sampling from AgoraPulse.
Top image courtesy of Shutterstock.
SimilarGroup, the makers of a would-be Alexa killer called SimilarWeb, which analyzes web rankings via a panel containing millions of web surfers, has raised a Series C round of funding. The new funding comes entirely from Naspers, the South African multinational media group that owns minority stakes in major Internet companies worldwide, including a 30 percent stake in Tencent (Asian Internet giant and makers of WeChat), as well as roughly the same in Russia’s Mail.ru Group.
SimilarGroup’s valuation and the size of the round aren’t being officially disclosed, but TechCrunch is hearing that the Series C is “significant” – that is, in the tens of millions.
To date, SimilarGroup had raised $7.1 million in seed through Series B rounds.
As a part of the new funding, SimilarGroup will gain a new board member from Naspers. However, the company is not able to disclose who this is.
“They are huge investors that build very big companies, and they’re the best investors a startup can have…Every company in their portfolio is a one billion dollar company,” touts SimilarGroup CEO Or Offer of his company’s new investor Naspers, noting that the firm has invested in major international businesses like Brazil’s e-commerce giant Buscapé, the “Amazon of India” Flipkart, and online classifieds platform OLX, to name a few.
He also notes that this is Naspers’ first investment in Israel and in the analytics and data space.
SimilarGroup was founded in 2009, but until fairly recently, was known for its suite of branded browser plug-ins (e.g. SimilarWeb, SimilarSites), which offered users suggestions of other websites similar to the one they’re visiting, and other useful information like web rankings, traffic sources, or reach, for example.
However, SimilarGroup’s larger goal was in developing a sizable network involving hundreds of un-branded browser plug-ins across a variety of verticals. This allowed it to develop a panel containing “tens of millions” of end users around the world. From these users, SimilarWeb is able to determine a website’s rankings at a scale that’s larger than competitors like Compete or comScore, which clock in at around 2 million users each.
In addition, the company has focused heavily on data science, employing those with machine-learning, big data and statistics backgrounds to ensure data accuracy.
Last fall, the company expanded upon its free web analytics offering with the launch of SimilarWeb Pro, a paid version of its measurement service. Today, that service has scaled to thousands of paying customers, including big names like eBay and Outbrain.
The company is currently at Mobile World Congress in Barcelona this week, talking about its move into the world of mobile app analytics. Currently, SimilarWeb is working to match up websites with their mobile app counterparts to provide a more holistic picture of a web company’s traffic. But over time, it plans to do more, including offering a look into not just the app traffic itself, but also whether that traffic is bought or organic, how well consumers are engaged with the app, and other metrics.
SimilarWeb’s plan to gain insight into the world of mobile apps isn’t all that different from how it operates online, via web plug-ins that don’t contain its company branding. On iOS and Android, the company has “tens” of apps in the respective app stores, also without the SimilarGroup branding.
Like Facebook acquisition Onavo, which offered detailed and exact mobile insights by nature of having a consumer-facing data compression utility on the App Store, SimilarGroup provides a data compression utility, too.
But that’s not all. It also has an app to increase browser speeds, another for safe browsing, another for proxy services, and more, plus some app partnerships. Because these are not being branded “SimilarGroup,” others are not able to manipulate their rankings because they don’t know which apps belong to the company.
Now a team of 60 and rapidly growing, SimilarGroup expanded to London in October, is opening up an office in Germany next month, and will have an office in New York by year-end. The U.S. office will be focused mainly on sales and marketing. Says Offer, the plan is to double the sales team in the months ahead.
Update: SimilarWeb has now announced the funding on its company blog.
Article courtesy of TechCrunch
A new iOS application called Kidizen is launching a mobile, peer-to-peer marketplace allowing parents to buy and sell their children’s clothing, toys, shoes and other easily shippable accessories. By offering parents the option to ship items directly to the buyers themselves, sellers can retain roughly 90%+ of the selling price, the company promises. This undercuts competitor ThredUP, who currently offers up to 80% of the selling price for clothing it resells on behalf of its customers.
The idea for Kidizen emerged from co-founders Mary Fallon’s and Dori Graff’s earlier platform, Itizen, launched in 2010, which had been focused on tracking the story attached to objects as they moved from one person to the next. The company found some initial traction among those with a specific passion around art or collectibles or other items, but the team soon realized that what users really wanted was a marketplace for buying and selling, not just tracking, items.
As parents themselves, Fallon and Graff decided to shift Itizen’s focus to “kid’s stuff,” so to speak.
Parents churn through kid’s clothing fast, explains Graff. “Kids go through 7 sizes in the first two years, so we’re constantly needing to find and get rid of things as kids grow,” she says. While much of our kids’ used clothing today becomes hand-me-downs or is deposited at Goodwill, a subset of that clothing includes the higher-end items that parents want some sort of return on investment from.
On Kidizen, most of the items sold on the site tend to be these higher-end articles of clothing. For instance, its top brand is Matilda Jane, which has an average selling price of $36. And its second most popular brand is Janie and Jack, which sells for around $16. Lower-end clothing, meanwhile, tends to be sold in lots.
Using the app is not all that different from similar marketplaces targeting women’s clothing buyers and sellers, including also ThredUP, as well as Poshmark, Threadflip, or Twice, for example. You can find and follow users whose items you like, and these selections will then appear in your feed. If you choose to sell items on site, you’re responsible for packaging and shipping them yourself, while payment processing is currently handled by PayPal.
But the founders tell us that “solving the shipping barrier” is something they hope to better address as they scale.
What’s interesting about Kidizen is that they’re launching a service that’s much like the one ThredUP pivoted from back in 2012, in hopes of finding a model that could better scale (which, so far, it has.)
Whether or not Kidizen will become similarly stuck remains to be seen. However, the timing is better for a service like this to exist – a number of women’s clothing startups and marketplaces have arrived and thrived on mobile, kid’s clothing flash sale site Zulily has IPO’d, and many of these companies cite growing if not dominant mobile user bases.
Going forward, Kidizen will tackle both web and Android, but for now it’s launching on iOS, where it had been beta testing with a few thousand users. During those tests, the metrics have proved solid, says CEO Dug Nichols, with 120% daily active user growth (observed month-over-month), 122% session growth month-over-month, and 130% revenue growth month-over-month.
The five-person, Minneapolis-based company has a small amount of angel funding from a variety of investors, including Emil Michael of Uber and others, but is looking to raise a larger seed round.
The mobile app is available here on iTunes.
Facebook is allowing page admins to keep deeper tabs on their competition by integrating Pages to Watch data into its page insights.
Previously, page admins could choose up to 5 pages to see updates about page popularity and activity, so marketers can easily check how competing or similar pages are doing. Or Fialkov of Fialkov Digital noticed that deeper data about pages tracked in this manner is now available in insights.
Through this, Facebook page admins can see how their own page compares to others they’ve tracked, in terms of new likes, posts and engagement.
Readers: Do you use the Pages to Watch feature?
Article courtesy of Inside Facebook
Korean startup VCNC has received a strategic investment from Japanese Internet giant DeNA to turn its couples app Between into an open platform for third-party developers. The amount of the deal was not disclosed. DeNA (pronounced D-N-A) is one of Japan’s top mobile Internet companies. Its core business is Mobage, a social games platform, but it also offers e-commerce and other online services.
VCNC, which launched in November 2011, has raised a total of $4 million in funding so far from investors including Softbank Ventures.
Between, which has been downloaded 5 million times so far, is among a host of apps for besotted lovebirds who aren’t content with just exchanging texts or emails. Other couples apps include the aptly named Couple, Avocado, and TheIceBreak.
VCNC co-founder Edward Lee said in an email that Between’s competitive strategy has focused on enhancing its core features, chatting and photo-sharing, as well as localizing for each market it enters.
“We have been basically focusing on providing couples with a stable service that will help their relationship. To do this, we have gone through many updates that our users may or may not notice,” said Lee. “However, our metrics show that our users now stay on our service for 510 minutes per month compared to 300 minutes per month last year.”
VCNC and DeNA’s strategic partnership will open Between to third-party developers. For users, this means that they will see more features on the app “that can help couples plan activities together, communicate and keep their memories better,” explained Lee.
Third-party services will be localized for specific markets as Between expands to Southeast Asia, the U.S. and Taiwan. In South Korea and Japan, VCNC has already started working with different businesses, including restaurants, wedding service vendors, movie theaters, and sports teams to add content to Between’s “Event Box” feature. In Japan, the app also increased engagement by selling stickers specifically made for that market.
Between currently monetizes through advertising and in-app purchases like animated stickers, but plans to add e-commerce as an additional revenue stream. For example, couples will be able to purchase gifts for each other, like flower deliveries, through the app, said Lee.
In a statement, DeNA president and CEO Isao Moriyasu said “purpose-specific social networks like Between are rapidly gaining popularity worldwide, following the massive adoption of general social networks and communication tools. DeNA sees a great global potential in this highly sophisticated mobile Internet service.”
Article courtesy of TechCrunch
Raising capital from investors is often a frustrating experience. While part of that frustration will always be present when working on high-risk projects, a lot of the aggravation comes from the lack of clear signposts that allow founders to judge their company’s performance. The reality is, most founders only ever hear a “yes” or a “no” from a venture capitalist, without a lucid understanding of the factors that influenced that decision.
There have been fantastic essays written about the fundraising process itself, such as Paul Graham’s guide posted last year. This post is not a guide to fundraising, but rather a look behind the curtain from my own experience as a venture investor at most of the quantitative metrics that are analyzed when judging an early-stage startup.
These metrics fall into five groups: financial, user, acquisition, sales, and marketing. While the statistics are important, the relevant weight any one metric will hold in a VC’s decision will depend on the type of startup, as well as the VC’s own opinion about which metrics matter and which do not.
When possible, I give guideposts on how to judge a particular value. These are from my own experience analyzing and engaging several hundred startups over the past two years, and all of my personal biases are certainly present. As with any guidelines in the venture business, companies break rules and expectations all the time.
Finances are crucial for any startup, and some companies are indeed funded by venture capitalists simply for having a great balance sheet and statement of cash flows. While this post could be a tutorial on the principles of accounting, I want to zoom in on a handful of key metrics.
Monthly Revenue Growth
Take the current month’s revenue, subtract last month’s revenue, and then divide by last month’s revenue.
One surprise for me is that this number is used more by founders than venture capitalists. The reason is that it shows proportion without magnitude, and magnitude matters a lot because a startup’s revenue is a major determinant on what the growth rate can be. If you made $20 last month, you need to increase that to $30 to get a 50 percent growth rate. That might be a single customer. But if you have a $10 million per month revenue business, reaching the same growth is significantly more challenging.
While VCs don’t use this metric as heavily as the next one we will discuss, some guideposts are still helpful. A growth rate of 40 percent per month is very good. A growth rate below 40 percent can be considered good if you can convince an investor that additional capital placed in sales and marketing will drive the growth rate higher.
Revenue Run Rate
Take the revenues recognized in the most recent month and multiply by 12.
VCs often talk about the current revenue run rate as well as the projected run rate in 12 months. So they will say something like “The company is currently at a $2 million run rate, but will be $10 million by the end of the year.” These numbers are often preferred, since they solve the magnitude problem.
Furthermore, almost all startups at the early stage are going to have to raise further capital. So when evaluating a startup, VCs are thinking about where the business has to be in 18–24 months when the next fundraise will happen. Getting a sense of the projected revenue run rate allows us to surmise whether series B or C growth investors are likely to be interested in a company. Thus, great performance is a revenue run rate that allows the next fundraise to happen. To get that number, reach out to investors and other founders until you have a good handle on the trajectory needed for your company.
Gross margin is calculated as total revenue minus the “cost of goods sold” divided by the revenue. Net margin is similar, except we also subtract the total expenses of the business as well (except for taxes and a handful of other accounting line items).
Margins are important because they show the ability of your startup to spend venture capital and get significant return. There are pretty bright guidelines on what your margins should be given an industry. For example, cloud storage and services companies can reach margins in the 90s, SAAS companies and other software businesses tend to be in the 70s, and hardware companies often struggle to get above 40 percent. Again, research your space until you know exactly what this metric should look like for your particular business.
One additional consideration is margin compression. Margins become tighter when competition is greater, so successful businesses must develop defenses against new entrants who might force a company’s margins lower. I personally have seen dozens of startups fail to receive funding because they could not articulate a strategy to avoid margin compression.
Burn Rate and Runway
This is the operating loss per month. To calculate runway, take the amount of available capital and divide by the monthly burn rate to get the number of months until your start-up runs out of cash.
These numbers show the efficiency of a business, the timeline for fundraising, and the need for capital. While startups are often run quite cheaply until their first fundraise, VCs will want to understand how you will increase your expenses to grow the business more quickly with any new infusion of capital. Lest anyone get the wrong impression, most investors expect their entire investment to be spent within 18–30 months. So if you’re asking for a fundraise of $10 million, but your monthly burn rate is $100,000, you must develop a very clear plan on how the burn rate is going to increase, and how that will propel the growth of the business.
Users are the lifeblood of any company, and therefore, VCs assiduously analyze everything about a startup’s users. Some user metrics are well-known, including daily active users (DAUs) and monthly active users (MAUs). I am actually going to skip those and instead will focus on a couple of other metrics that provide keen insight into a startup’s quality.
Choose a time frame, such as one week. Take the number of users at the beginning of the week as a base. Now, track all invites that these users make to other people (for example, using an “Invite Your Friends” link). Aggregate the number of new users entering through this channel and then calculate the ratio of new users to old users and add 1. So, if you start with 1,000 users, and they bring on board 200 new users, we have a ratio of .2 + 1 (our base population) and that leads to a k-value of 1.2.
The k-value is a measure of virality, and is borrowed from epidemiological studies of disease progression. This number is exponential, and defines the magnitude of the user growth rate by word of mouth (as opposed to paid acquisition). For social media startups, this is often the only metric that matters (the other is retention).
Thankfully, there are some clear guidelines for performance. A value less than 1 means that the population is dying and will cease to exist. A value of 1 means that the population is stable. A value of 1.2 is strong, and a value of over 1.4 means incredible growth.
If you start with 1,000 users and have a k-value of 1.2 per week, after 30 weeks you will have about 200,000 users. But if you have a k-value of 1.4, you will have more than 17 million users within the same period. Growing at such a speed usually doesn’t last long, since old users are not as likely as new ones to bring additional users to the product (they already invited everyone!). However, some companies like Facebook and Snapchat have exhibited extremely high growth like this for an extended period of time, so it is certainly possible.
Proportion of Mobile Traffic
Take the number of visits from mobile and divide by the total number of visits to your product.
This is a simple ratio, but an important one in a world where more and more of our time is spent on mobile. Nearly every company that targets consumers and talks to an investor today will have to discuss their mobile strategy. Data today shows that people are potentially spending a majority of their computer usage on mobile devices. Engaging such users is crucial today.
Cohort Analysis and Churn
Take all of the users who joined a product in a given time frame (usually a week). Then calculate how many of these users engaged with the product over every successive week. Churn is slightly different and is calculated by taking the number of users who leave and dividing by the number of total users (regardless of start time).
Cohort analysis is a metric by which we see the decay in user engagement. Users leave even the most sticky products for any number of reasons. For instance, small and medium businesses may leave your product because they are shutting down operation. VCs really like to see cohort-analysis tables, because they give us a perspective on when users are leaving the platform.
First-week retention is probably the most immediately interesting number. For social media, 80 percent one-week churn is very high, 40 percent is good, and only 20 percent is phenomenal. For paid products like SaaS, churn and other conversion metrics tend to make more impact here rather than pure cohort analysis. SaaS churn in the low single digits (1–3 percent) is strong.
Seasonality can be an important component to elucidating cohort analysis. Education startups often see their users return at the beginning of the school year as people think through their software choices. Be sure your story includes all facets of your cohort analysis.
We know that users are important for a business, but they don’t often walk right through the door. Instead, companies have to exert significant resources to get users to sign up and potentially pay for the product they are selling. Thus, these metrics go to the core of a business model and its sustainability.
Cost of Acquiring a Customer and Payback
Take the amount spent on all forms of user acquisition (search engine marketing, content marketing, public relations, etc.) and divide by the number of new users within a given period. Thus, if we spent a total of $100,000 acquiring users, and we have 100 new users, we just paid $1000 per user (fully-blended).
This is the bread-and-butter of almost all subscription companies, but also applies to most other startups. While the fully blended number is interesting, it doesn’t give a venture capitalist a lot of information about the channels that users are joining from. Therefore, we often split this into paid and free channels.
Free acquisition is what it sounds like – someone started using a product without seeing an advertisement, perhaps through word of mouth, or maybe reading about it in the press. In contrast, paid acquisition is generally synonymous with advertising. If you spend $60 on Google AdWords and get one customer, you had a CAC of $60. We often express the number of free versus paid acquisitions as a ratio, since this can show if the growth of the user base is primarily organic.
There are a lot of signposts for CAC, almost all of them dependent on the type of business. In general, the higher the ARPU – average revenue per user – the higher the cost of acquiring a customer can be. In social media, this number needs to be as low as possible (and can be near zero if growth is purely viral). In e-commerce, great CAC prices are around $30–$60 per user. Acquisition prices above that are not uncommon, but they do require more diligence. Prices above $200 are pretty rare in successful online businesses. Then again, financial services often have CACs in the upper hundreds, so, as always, there are exceptions.
Another way to judge whether the CAC is reasonable is to calculate the payback time for a new user. In e-commerce, this is generally measured as the number of orders that need to be purchased to cover the cost of acquiring a customer. If the number of orders is one, that is fantastic – it means the customer is immediately profitable. For advertising-driven and freemium subscription startups, payback times of 3–6 months are good, and anything more than 18 months is likely going to be very hard to swallow.
Net Promoter Score
Run a survey among your customers asking how likely it is that they will recommend (i.e. promote) your product to other people on a 1 to 10 scale. Promoters are those who give an answer of 9 or 10, and detractors are those that respond with a 1 or 2. Calculate the proportion of both groups as a total of the survey population. The net promoter score is the proportion of promoters minus the proportion of detractors. Thus, if 50 percent of your customers are promoters and 10 percent are detractors, your net score is 40.
This is one of my favorite metrics. It shows how satisfied your customers are with your product and your overall experience. NPSs of 50 are considered excellent, and companies like Amazon and Google generally hover around such numbers. However, scores as high as 80 or even 90 are possible. Businesses that inculcate such fervency in its customers are highly valuable, and should raise capital easily.
So you want to have a company that has actual, flesh-and-blood customers? If so, then you are going to have to build sales channels to efficiently build revenue. These metrics are helpful ways to judge the success of those efforts.
Take the net growth of subscription revenue over two quarters, multiply by 4, and then divide by the total spend on sales and marketing. So if in Q1 we had $200,000 in subscription revenue, and in Q2 we have $400,000, and we spent $300,000 in sales and marketing in Q1, we would have $400,000-$200,000, which is $200,000 net growth, multiplying by 4, we have $800,000, and dividing by our expenses, we have a ratio of 2.66.
This is arguably the best-named metric here, and a favorite of Scale Venture Partners, which popularized it. Essentially what this metric calculates is our return on investment of spending a dollar on sales and marketing. For each dollar we spend, we get the magic number back in additional revenue. A magic number above 1 means that a company has found a way to scale sales and marketing to build sustainable profit growth. A number below 1 isn’t necessarily terrible, but it also means that the company is not scaling as efficiently as other companies.
Basket Size and Order Velocity
The average sales price (ASP) is the price of a typical order. Order velocity is the time it takes for a customer to make a repeat purchase.
For e-commerce businesses, these are among the most important metrics to calculate. ASP often drives the rest of a startup’s fundamentals, and so like run rate, acts as a clustering algorithm to quickly assess a startup’s business model for VCs. A high ASP generally means wealthier customers, fewer repeat purchases, more flexibility on the cost of acquiring a customer, etc. Order velocity also is influenced by ASP.
For instance, Uber is a low ASP, high-velocity e-commerce business, whereas One Kings Lane tends toward a high ASP but low-velocity business. There is no “best” answer regarding these metrics, but generally, the lower the ASP, the higher the velocity of sales needs to be to compensate.
Average Sales Cycle
Take the date that a customer is first contacted, and then the date that they make their first purchase. The difference is the sales cycle. Average across all customers.
Like ASP, the average sales cycle often determines a lot of the fundamentals of a startup’s business, and therefore tells us about how to think about a company rather than its performance. We tend to use average sales cycle for enterprise and subscription sales, whereas we use order velocity for e-commerce and other repeatable purchases. Sales to government and education institutions generally have the longest cycles, possibly two years or even longer. Sales to Fortune 500 businesses are shorter, generally 6–18 months depending on the product (for instance, software is easier to purchase than storage infrastructure). Converting a customer in a freemium model can take 18 months or more, but generally a cycle below one year is good.
Long Term Value
This is the total value of a customer over the life of that customer’s relationship with the company.
This metric is really well-known, so I won’t cover it in-depth. It works hand-in-hand with churn, since the length of the relationship is inversely proportional to the churn. Calculating this value tends to be really hard, and getting to a number that is actually comparable across companies is challenging. VCs often have to substitute more objective metrics like ASP to get to values that are more easily measurable. Nonetheless, this number is crucially important, particularly as a company scales for the long-term.
Startups are competing for the limited time and resources of customers. Understanding the size of a market and its composition is the final metric analysis, but also a key one, since it determines the potential ceiling in value for a company.
Total Addressable Market
This is the total amount of money spent in a startup’s defined space.
While incredibly important, there is a huge amount of fuzziness in any sort of market analysis. Startups may want to define themselves a certain way, and venture capitalists may have an entirely different market in mind when they analyze a startup.
Generally speaking, markets greater than $1 billion are good, and any market definition that uses the word “trillion” is likely to get a laugh from a venture capitalist. Often, describing the TAM is more an opportunity for a founder to demonstrate an understanding of their startup’s market than it is about actually getting a quantitative figure.
Average Wallet Size
This is a key metric for a lot of businesses, particularly enterprise companies. Average wallet size is the total amount that a single customer can spend in a given period of time for a category of services (i.e. its budget). This metric is important because it gives a sense of the financial capabilities of your customers, and it allows a VC to judge how expensive your product is relative to a customer’s appetite.
This number cuts both ways. Startups that charge a small amount compared to the average wallet size are just as risky as those that charge a very high proportion of the wallet size as their product’s price. You don’t generally want to be insignificant, nor do you want to be so large that you knock out an entire budget.
This essay is a crash course in the metrics used in the quantitative analysis of startups by early-stage investors. As I said before, every investor has their own approach, and every startup is unique. Guidelines here are general, and more specialized information from your specific space is always the most important benchmark by which to judge your startup’s performance.
I would like to leave with one important observation, and that is that one metric tends to drive the curiosity of a venture capitalist more than a complete set of decent ones. An incredible k-value by a social media company, an extremely short sales cycle in the Fortune 500, and an incredibly high net promoter score in e-commerce are just some examples of how a single metric can be the defining story of your company.
Finally, and perhaps most importantly, quantitative metrics are informative about various dimensions of a startup’s performance, but they are not conclusive proof of the worth of a startup. Dazzling products with superb design, strong teams, unique markets, and other areas are just as vital to the success of a business. Outstanding metrics are probably necessary to successfully fundraise (particularly today), but they are not usually sufficient to guarantee an outcome. Great companies are built from greatness, both quantitative and qualitative.
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Article courtesy of TechCrunch