For every consumer internet start up, the conversation of growth vs engagement has come up. (If it hasn’t, then it should). They can take many shapes, but they’re widely regarding as the “rule-of-thumb” metrics for success. Either or both should be “up and to the right.”
Read any press release or listen to any founder and they’ll probably site one of the two as an indicator of success — likely that which is most impressive — in the form of user numbers (aka growth) or something like pictures sent (engagement).
There is a lot of nuance around these two keystone start up metrics — such as how to exactly measure them and what needs measuring— but the more important issue for young companies to tackle: these two metrics are at odds, organizationally.
In a start up, with your limited resources, you need to be focused on as few things as possible. Whatever you decide to focus on has implications for your product, your users, and your organization. Whatever you make the goal, the entire organization needs to be aligned.
So should you be focusing on growth or focusing on engagement?
Why Growth and Engagement are Important
If you’re Paul Graham of YC lore, then the very definition of a start up is growth. I don’t disagree. If your start up generates revenue from day one, whatever makes revenue grow the fastest is probably the best course of action.
There is, however, a whole genre of apps and sites that don’t make revenue from day one. Most of these start ups have to reach a large user base in order to turn on a significant revenue generating engine. Twitter, Pinterest, even Google falls into this category in my opinion — they wouldn’t be able to sell ads if they didn’t have a significant user base. Growing quickly and achieving scale are clearly necessary for revenue.
But what if your users don’t come back after their first visit? It’d be pretty difficult to serve ads or create a business if you don’t have users regularly visiting your product or service. That’s some of the problem with start ups that “hack” growth in unsustainable ways. It looks great as user numbers rise, but there’s no telling if those users will come back. No return users, no business.
So there are two pieces to the revenue generation puzzle — scale and engagement. Both are absolutely necessary. Accordingly, both get a lot of attention as key metrics for start up success.
But They’re Mutually Exclusive
Start ups have to ruthlessly prioritize their objectives. What is the one thing the start up is going to accomplish in the next week, month, year? By necessity, other objectives take the back seat.
This is why growth and engagement are tricky. They’re both necessary for success but young can’t companies can’t really focus on both.
Some practical examples of their exclusivity:
Should your designer be working on the “time to Aha moment” flow or on the “Invite your friends” flow?
Should your engineer add Facebook post functionality or improve the app’s responsiveness and load time?
Should your marketer be focused on community management or strategic partnerships?
It’s a tough call.
Enter the VCs
To add to the difficulty of the decision, many start ups are dependent on VC or angel funding for their first few years or longer. A VC has to believe your company is worth taking a bet on so they look to some tangible, quantifiable statistic to justify their risk (they are finance folks after all). Enter the conversation about growth and engagement.
While all VCs need a compelling story about growth or engagement in order to invest, that story can take a lot of different forms. Here are a few that have popped up in conversation.
- Week over week growth of users/revenue (10% is great)
- Month over month growth of users/revenue (40% is great)
- Total users (A bajillion is great — this bar keeps rising)
- Daily active users (40% is great)
- Monthly active users (50% is great)
- “5 out of 7″ — what percent of weekly active users are active 5 out of 7 days a week. (60% is great)
VCs see a lot of companies so they tend to form opinions about what metrics are healthy. The above metrics are very important, but in reality they’re symptoms of success rather than leading indicators.
VC ears tend to perk a little more when they hear growth numbers rather than engagement numbers. If your growth numbers are phenomenal, you should have an easier time raising. Once again, this isn’t indicative of your company’s potential success, but growth is an easier story for them to tell in a partner meeting. It’s fair because it’s also more closely correlated to a large addressable market and a large potential return.
Find Your Effectiveness Metric
I was speaking with a founder of a launched mobile app that isn’t generating revenue. He just raised a great seed round from top-tier investors.
In his pitch, he didn’t discuss user numbers and he didn’t discuss daily actives either.
The story he told was based on a metric he defined internally. It followed the rough model of:
If a user is exposed to A, what percentage of the time do they successfully complete B.
Step A was the social onboarding process of the app and step B was the key desired action. The founder created a metric that measured the core value exchange and effectiveness of his app. That was the metric he explained and that was the metric that proved his app was working. The conversation of his funnel was 85%.
This is an amazing example of someone framing and executing on a key metric that is business specific. While it alludes to engagement, it really measures the app on how effective it is at delivering value.
Because the market the app is addressing is proven and large, then he can tell a really compelling story to VCs, employees, the press, and stakeholders:
I’ve built an app that is proven to work that is addressing a large market.
The key is to find a metric that measures the effectiveness of your solution for a given market. If it’s truly effective, your engagement numbers should be solid and your growth should be happening somewhat organically.
Tell the Story
When someone asks about growth or engagement of your product, don’t be afraid to be a politician — answer the question they should have asked.
Talk about the effectiveness metric that is at the heart of your product. It’s really the only metric that explains how well you’re doing.
The most valuable insight on metrics that I’ve received in the last few years of asking these questions was the following:
Don’t worry about the metrics you think VCs or the press want, worry about the metrics that prove to you and your team that you’re getting out of bed in the morning to work on the right thing.
Such good advice.
Tell the story of why you’re building what you’re building. You’re rational, you’re smart,and you’re passionate about the problem and you care about your users. Don’t bullshit yourself. Find a metric that is core to your business and accurately represents whether or not your long hours at the office are justified.
Find that one metric that accurately represents your business’ health and make sure you believe the story it tells. Focus on aligning your organization, product decisions, and investors behind improving your one metric.
That’s when up and to the right actually means something.