Be wary of vanity metrics in Web startups - venture capitalists
In an insightful article published by Reuters, the writeup tackles about the incredible statistics being churned out by growing group of social and mobile Web services. Boasting that they could be the next Facebook Inc or Twitter Inc, online startups were said to be showcasing eye-popping statistics that indicate their popularity in users. These statistics, the report said, would range from Web page views, user signups and numbers of shares, with online startups claiming that such were measures of their successes.
However, some private equity firms do not depend on such metrics. These data, the report deduced, are usually self-reported and do not offer a true definition of the viability of the online startup in a financial sense.
In a telephone interview with the news agency, Bessemer Venture Partners partner David Cowan said, "I wouldn't buy a pizzeria just because the phone is ringing off the hook. First, I have to understand who is calling, why, from where and can we really sell them pizza."
The issue about vanity metrics came into view last wee when popular mobile photo and video messaging startup Snapchat boldly announced that its user base generated 400 million in snaps on a daily basis as reports revealed that the startup had turned a USD3 billion offer from Facebook down. The 400 million daily snaps, as a Snapchat representative explained to Reuters in an email, referred to the number of photos and videos users received. However, the report said the representative did not provide additional clarification. The report also gleaned info from a tweet from Snapchat last week that 88% of snaps are sent to just one recipient.
On the other hand, industry observers believe these data might have been driven up largely by automated software that simulates real users in order to disseminate paid advertising links via social networks.
Venture capitalists were said to operate on a series of measures in order to cut through the vague metrics of online startups. According to the report, venture capitalists obtain a feel of a company's repeat user base by viewing the ratio of daily users to weekly and monthly users. Then, the venture capitalists strip out growth derived from unsustainable practices like anything associated with spam or paid advertising.
Nonetheless, Cowan offers words of caution, despite going through the process of straining out bloated metrics. "People have to be careful about the extent to which they use these metrics as indicators of value," Cowan said.
Join the Conversation