Startup Metrics for Pirates

KAUSTNov 2013

Dave McClure @DaveMcClure

http://500.co http://500hats.com

http://slideshare.net/dmc500hats

AARRR!

AARRR!

Dave McClureFounding Partner & Troublemaker, 500 Startups

00’s & 10’s:• VC: Founders Fund, Facebook fbFund, 500 Startups• Angel: Mashery, Mint.com, SlideShare, Twilio• Marketing: PayPal, Simply Hired, Mint.com, O’Reilly

80’s & 90’s:• Entrepreneur: Aslan Computing (acq’d by Servinet/Panurgy)• Developer: Windows / SQL DB consultant (Intel, MSFT)• Engineer: Johns Hopkins‘88, BS Eng / Applied Math

500 StartupsGlobal Seed Fund & Startup Accelerator

• What is 500?– $80M under management– 30+ people / 10 investing partners– Locations: SV, NYC, MEX, BRZ, IND, CHN, SE Asia– 1000+ Founders / 200+ Mentors– 25+ positive exits in ~3 years

• 500+ Portfolio Co’s / 40+ Countries– Wildfire (acq GOOG, $350M)– MakerBot (acq SSYS, $400M)– Viki (acq Rakuten, $200M)– Twilio– SendGrid – Credit Karma– VivaReal– Udemy– Zozi– The RealReal– Virool– Visually– Gengo– PicCollage– 9GAG

500 Startups: Global Seed FundOver 150+ startups outside US, in 40+ countries

[ This Talk ]

Topics

• Basic Concepts of “Startup Metrics 4 Pirates”• 3 Steps to AARRR: Product, Market, Revenue• Constructing MVP: Just ONE Feature?• Design (UX) & Distribution (MKTG)• Winning = Market, Revenue, Profit?

Key Concepts

• MVP = F(Customer, Problem, Time or $$$)• PMF = F(Customer, Solution, Alternatives)• AUX = F(Customer, Design/UX, Metrics)• ACQ = F(Customer, Campaign, Vol, Cost, Conv)• WIN! = F(Customer, Usage, Dist, Revenue)

DO Marketing! (It’s Not Evil)

• Marketing is Both Qualitative + Quantitative• Qualitative: Create Emotion, Drive Action• Quantitative: Measure Results of Action• Design (UX) & Distribution (MKTG) Matter• Volume (#), Cost ($), Conversion (%)

Changes in Tech Startups• LESS Capital required to build product, get to market

– Dramatically reduced $$$ on servers, software, bandwidth– Crowdfunding, KickStarter, Angel List, Funders Club, etc– Cheap access to online platforms for 100M+ consumers, smallbiz, etc

• MORE Customers via ONLINE platforms (100M+ users)– Search (Google)– Social (Facebook, Twitter)– Mobile (Apple, Android)– Local (Yelp, Groupon, FourSquare)– Media (YouTube, Pinterest, Instagram, Tumblr)– Comm (Email, IM/Chat, Voice, SMS, etc)

• LOTS of little bets: Accelerators, Angels, Angel List, Small Exits– Y Combinator, TechStars, 500 Startups– Funding + Co-working + Mentoring -> Design, Data, Distribution– “Fast, Cheap Fail”, network effects, quantitative + iterative investments

Lean Startup:Simpler, Faster, Cheaper, Smarter

1. Startup Costs = Lower.

2. # Users, Bandwidth = Bigger.

3. Transaction $$$ = Better.

Building Product => Cheaper, Faster, Better Getting Customers => Easier, More Measurable

Iterative Product & Marketing Decisions

based on Measured User Behavior

Industry Changes

• Startup Efficiency, Reduced Capital Costs

• Growing Market, Growing Platforms• VC Industry Upheavals (2000, 2008)• Super Angel -> Micro VC: Seed Funds (ex: First Round)• Incubators & Accelerators (ex: Y Combinator)

• Big VC (ex: A16Z) & Platforms (ex: Angel List)

more info see: http://PreMoney.co

Before & After 2 Dot-Com CrashesDaft Punk Startup: Simpler, Faster, Cheaper, Smarter

Before 2000•Sun Servers•Oracle DB•Exodus Hosting•12-24mo dev cycle•6-18mo sales cycle•<100M people online•$1-2M seed round•$3-5M Series A•Sand Hill Road crawl•Big, Fat, Dinosaur Startup

After 2008•AWS, Google, PayPal, FB, TW•Cloud + Open Source SW•Lean Startup / Startup Wknd•3-90d dev cycle•SaaS / online sales•>3B people online•<$100K incub + <$1M seed•$1-3M Series A•Angel List global visibility•Lean, Little, Cockroach Startup

Series A Crunch: Good or Bad?

Series A rqmts: $1M revenue, 1M active users, 10M downloads, 100% YoY growth

•Lots of Incubation / Seed startups will “fail”•BUT: Fail Budget = $50-$500K, not $5M+•Many “failed” startups = ramen-profitable, small acquisition, or MBA alternative (<$100K)•Series A/B VCs have lots to choose from

•Overall, founders / market getting smarter•More focus on customers, problems, revenue•Many die, some survive (1-5x), a few thrive (20x+).

Silicon Valley 2.0: Lots of Little Bets

aka “MoneyBall for Startups”

• VC Evolution: Physician, Scale Thyself (Aug 2012)• MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)

15

500 Strategy: “Lots of Little Bets”*

1) Make lots of little bets pre-traction, early-stage startups

2) after 6-12 months, identify top 20% performers and double-down higher $$$

3) conservative model assumes-5-10% large exits @20X ($50-100M+)-10-20% small exits @5X ($5-50M)

*See Peter Sims book: “Little Bets”

[The Lean Startup]

[Startup Metrics 4 Pirates]

Just Gimme the GOOD Metrics.Users, Pages, Clicks, Emails, $$$...?

Q: Which of these is best? How do you know?

• 1,000,000 one-time, unregistered unique visitors

• 500,000 visitors who view 2+ pages / stay 10+ sec

• 200,000 visitors who clicked on a link or button

• 20,000 registered users w/ email address

• 2,000 passionate fans who refer 5+ users / mo.

• 1,000 monthly subscribers @ $5/mo

the good stuff.

The Lean Startup• Talk to Customers; Discover Problems• Progress ≠ Features (Less = More)• Fast, Frequent Iteration (+ Feedback Loop)• Measure Conversion; Compare 2+ Options• Focus on Product/Market Fit• Keep it Simple & Actionable

Discover Customers(Steve Blank, SteveBlank.com)

LEARN BUILD

MEASURE

IDEAS

CODEDATA

Iterate.(Eric Ries, StartupLessonsLearned.com)

AARRR!: Startup Metrics Model

Website.com

Revenue $$$

Revenue $$$

Biz DevBiz DevAds, Lead Gen, Subscriptions, ECommerce

Ads, Lead Gen, Subscriptions, ECommerce

ACQUISITIONACQUISITION

SEOSEOSEMSEM

Apps & WidgetsApps & Widgets

AffiliatesAffiliates

EmailEmail

PRPRBiz DevBiz Dev

Campaigns, Contests

Campaigns, Contests

Direct, Tel, TV

Direct, Tel, TV

Social NetworksSocial

NetworksBlogsBlogs

DomainsDomains

Retention

Emails & AlertsEmails & Alerts

System Events & Time-based Features

System Events & Time-based Features

Blogs, RSS, News FeedsBlogs, RSS, News Feeds

Startup Metrics for Pirates

• Acquisition: users come to site from various channels• Activation: users enjoy 1st visit: "happy” experience• Retention: users come back, visit site multiple times• Referral: users like product enough to refer others• Revenue: users conduct some monetization behavior

AARRR!AARRR!

(note: If you’re in a hurry, Google “Startup Metrics” & watch 5m video)

One Step at a Time.

1. Make a Good Product: Activation & Retention

2. Market the Product: Acquisition & Referral

3. Make Money: Revenue & Profitability

Startup Challenges

Startups have problems in 3 key areas:

• Management: Set Priorities, Define Key Metrics

• Product: Build “Right” Features. Measure, Iterate.

• Marketing: Distribution, Distribution, Distribution. (Search, Social, Mobile)

[ Constructing MVP ]

Role: Founder / CEO

Q: Which Customers? Problems? Metrics?

A: Focus on Critical Few Actionable Metrics(

if you don’t use the metric to make a decision, it’s not actionable)

• Hypothesize Customer Lifecycle• Target ~3-5 Conversion Events • Test, Measure, Iterate to Improve

Optimize 4 Happiness (both User + Business)

• Define States of User + Business Value• Prioritize (Estimate) Relative Value of Each State• Move Users: Lower Value -> Higher Value• Optimize for User Happiness + Business $$$• Achieve High Cust Value + Low ACQ$ @ Scale

$$$

What is Minimum Viable Product ?

MVP = F(Customer, Problem, Time or $$$)

• Focus on CUSTOMER– Qualitative Discovery, Quantitative Validation

• Get to know habits, problems, desires (FUN MATTERS)– what causes pain? what causes pleasure?

• Ship the simplest, fastest solution that solves the problem.

• Define 1-5 TESTABLE Conversion Metrics of Value– Attention/Usage (session time, clicks)– Customer Profle Data (email, connect, profile)- Revenue (direct or indirect)- Retention (visits over time, cohort behavior)- Referral (users evangelize to other users)

Example Conversion Metrics(note: *not* actuals… your mileage may vary)

Stage Conversion Status Conv. %

Est. Value(*not* cost)

Acquisition Visitors -> Site/Widget/Landing Page(2+ pages, 10+ sec, 1+ clicks = don’t abandon)

60% $.05

Activation “Happy” 1st Visit; Usage/Signup(clicks/time/pages, email/profile reg, feature usage)

15% $.25

Retention Users Come Back; Multiple Visits(1-3x visits/mo; email/feed open rate / CTR)

5% $1

Referral Users Refer Others(cust sat >=8; viral K factor > 1; )

1% $5

Revenue Users Pay / Generate $$$(first txn, break-even, target profitability)

2% $50

[ Getting 2 PMF ]

Role: Product / Eng / Design

Q: What Features to Build? Why? When are you “Done”?

A: Easy-to-Find, Fun/Useful, Unique Features that

Increase Conversion (stop iterating when increase decelerates)

• Wireframes = Conversion Steps• Measure, A/B Test, Iterate FAST (daily/weekly)• Optimize for Conversion Improvement

– 80% on existing feature optimization– 20% on new feature development

What is Product/Market Fit ?PMF = F(Customer, Solution, Alternatives*)

• Product / Market Fit occurs when:– Customers like your stuff better than other options

– Not static, Not optimal – just Local Max F(customers, solution, time)

– make sure you’re moving in optimal direction 2 local max

• Q: what competitive solutions are available? – … that your customers know about?– how are you diff/same? – in ways that people care about? (will pay for)

[ Testing 4 AUX ]

Discover MeaningWhy Should Users CARE About Your Product?

Kathy Sierra:“CreatingPassionateUsers”

Discover MeaningKeywords, Images, Call-to-Action

Top 10 - 100 words• Your Brand / Products• Customer Needs / Benefits• Competitor’s Brand / Products• Semantic Equivalents• Misspellings

Relevant images• People• Products• Problems• Solutions

Call-to-Action• Words• Images• Context• Button/Link• Emotion

Result• Positive?• Negative?• Neutral (= Death)• A/B test & Iterate

How To Tell if Design/UX is Good?

AUX = F(Customer, Design/UX, Metrics)

• If Users Use Your Product Then It’s GOOD.– Define Metrics, Measurability for Design / UX– Focus on Psychology of User– Relative to Competitive Alternatives (that your customers know about)

– Keep Testing 4 Awesomeness

• RAMP Mktg & $$$ AFTER it’s clear your MVP is:– Functional = useful for >1 customers– Differentiated = better than other stuff availabile– Awesome (see above)

[ Metrics 4 ACQ ]

Role: Marketing / Sales

Q: What channels? Which users? Why?A: High Volume (#), Low Cost ($), High Conv (%)

• Design & Test Multiple Marketing Channels + Campaigns• Select & Focus on Best-Performing Channels & Themes• Optimize for conversion to target CTAs, not just site/landing page• Match/Drive channel cost to/below revenue potential

• Low-Hanging Fruit: – Blogs– SEO/SEM– Landing Pages– Automated Emails

Platforms 2.0Search, Social, Mobile,

Video, Messaging

Distribution PlatformsCustomer Reach: 100M-1B+

• Search: Google, Baidu, Yahoo/Bing, Yandex

• Social: Facebook, Twitter, LinkedIn, TenCent/QQ, WeChat

• Mobile: Apple (iOS), Android

• Media: Video (YouTube), Photos (Instagram, Pinterest), Blogs

• Comm: SMS, IM (WeChat, WhatsApp), Skype, Phone/Voice, etc

MAARRRketing Plan

Marketing Plan = Target Customer Acquisition Channels• 3 Important Factors = Volume (#), Cost ($), Conversion (%)• Measure conversion to target customer actions• Test audience segments, campaign themes, Call-To-Action (CTAs)

[Gradually] Match Channel Costs => Revenue Potential • Increase Vol. & Conversion, Decrease Cost, Optimize for Revenue Potential• Avg Txn Value (ATV), Ann Rev Per User (ARPU), Cust Lifetime Value (CLV)• Design channels that (eventually) cost <20-50% of target ATV, ARPU, CLV

Consider Costs, Scarce Resource Tradeoffs• Actual $ expenses• Marketing time & resources• Product/Engineering time & resources• Cashflow timing of expense vs. revenue, profit

ACQ = F(Customer, Campaign, Vol, Cost, Conv)

[ What is WINNING? ]

Choose #WINNING Metrics

WIN = F(Customer, Usage, Dist, Revenue)

• after MVP functional use, several options:– better Usage – Activation & Retention (AUX)

– more Users -- Distribution / Acquisition– more Money --- Monetization

• understand ACQ$ vs REV$, optimize 4 short-term– higher volume usually a priority– costs may change as volume increases

[ The Lean Investor ]

Startup 2.0: “Lean Investor” Model

Method: Invest in startups using incremental investment, iterative development. Start with lots of small experiments, filter out failure, and expand investment upon success.

• Incubator: $0-100K (“Product Viability”)• Seed: $100K-$2M (“Expand Distribution”)• Venture: $1M-$10M (“Maximize Revenue”)

Investment #1: Incubate(“Product”)

• Structure– 1-3 founders– $0-$100K investment– Incubator environment: multiple peers, mentors/advisors

• Build Functional Prototype / “Minimum Viable Product” (MVP):– Concept->Alpha, ~3-6 months– Develop Minimal Critical Feature Set => Get to “It Works”– Instrument Basic Dashboard, Conversion Metrics

– Test Cust. Adoption (10-1000 users) / Cust. Satisfaction (Scale: 1-10)

• Demonstrate Concept, Reduce Product Risk, Test Functional Use

• Develop Metrics & Filter for Follow-on Investment

Investment #2: Seed(“Market”)• Structure

– 2-5 person team– $100K-$2M investment– Syndicate of Angel Investors / Small VC Funds

• Improve Product, Expand Market, Test Revenue:– Alpha->Beta, ~6-12 months

– Customer Sat ≥ 6 => Get to “Doesn’t Suck”– Setup A/B Testing Framework, Optimize Conversion– Test Marketing Campaigns, Cust Acqstn Channels

• Prove Solution/Benefit, Assess Market Size

• Test Channel Cost, Revenue Opportunity

• Determine Org Structure, Key Hires

Investment #3: Venture(“Revenue”)

• Structure– 5-25 person team– $1M-$10M investment– VC Investors

• Make Money, Get to Sustainability:– Beta->Production, 12-18 months– Customer Sat ≥ 8 => “It Rocks, I’ll Tell My Friends”– MktgPlan => Predictable Channels / Campaigns + Budget– Scalability & Infrastructure, Customer Service & Operations– Connect with Distribution Partners

• Prove/Expand Market, Operationalize Business

• Future Milestones: Profitable/Sustainable, Exit Options

Appendix

Links & ResourcesAdditional References:

• Influence: The Psychology of Persuasion Robert Cialdini (book)

• The Mating Mind Geoffrey Miller (book)

• Putting the Fun in Functional Amy Jo Kim (etech 2006 preso)

• Futuristic Play Andrew Chen (blog)

• Don’t Make Me Think Steve Krug (book)

• Designing for the Social Web Joshua Porter (book, website)

• Startup Lessons Learned Eric Ries (blog)

• Customer Development Methodology Steve Blank (presentation, blog)

• Startup-Marketing.com Sean Ellis (blog)

• Understanding Comics Scott McCloud (book)