Startups love to point to big growth numbers, and the press loves to publish them. We are as guilty as anyone else in this regard: one million downloads, 10 million registered users, 200 million tweets per day. These growth metrics can often be signs of traction (which is why we report them), but just as often they are not. It is important to distinguish between real metrics and what Lean Startup guru Eric Ries calls vanity metrics.
Vanity metrics are things like registered users, downloads, and raw pageviews. They are easily manipulated, and do not necessarily correlate to the numbers that really matter: active users, engagement, the cost of getting new customers, and ultimately revenues and profits. The latter are more actionable metrics. As First Round Capital’s Josh Kopelman recently advised on Founder Office Hours, “The real data is retention and repeat usage.” Startups that focus on the real metrics can make their products better, attract more customers, and make them happier.
It is important for startups to properly instrument the data they track so that they can get a handle on the true health of their business. If they track only the vanity metrics, they can get a false sense of success. Just because a startup can produce a chart that is up and to the right does not mean it has a great business. A mobile apps could have millions of downloads but only a few hundred thousand active users, or a freemium website might see exploding traffic growth but barely any conversions to paying users.
Many startups, of course, track one set of numbers internally and selectively share another set of vanity numbers externally with the press. The worst is when startups try to pitch us with raw growth numbers (we are up 400%), but without any context (400% from what, 1,000 users or 100,000?). We always ask for more meaningful numbers, but those are not always forthcoming.
The vanity metrics aren’t completely useless, just don’t be fooled by them. There are ways to back into real numbers from the vanity metrics. VC Fred Wilson blogged today about his 30/10/10 rule: 30 percent of downloads or registered users are active once a month, 10 percent are active once a day, and 10 percent of the daily users will be the maximum number of concurrent users. These are the patterns he is seeing in his portfolio companies and the startups pitching him.
Startups would be better off, however, reporting real metrics from the start. Vanity metrics can catch up to them, especially if those numbers do not correspond to the real numbers. Facebook is a great example of a company that focuses on the right numbers. Even in its college-only days, it would always talk about daily active users (the users who come back every day) and how fast it took them to take over a particular campus. If more startups would measure and share the right metrics from the start, the rest of us would focus on them too.
Photo credit: Skye Suicide