Silicon Valley freaks out over these metrics

Kumail Nanjiani, T.J. Miller, Thomas Middleditch, Zach Woods, Martin featured in Silicon Valley
John P. Johnson | HBO
Kumail Nanjiani, T.J. Miller, Thomas Middleditch, Zach Woods, Martin featured in Silicon Valley

Spoiler alert: It is not possible to review and comment on Episode 9 of the HBO show "Silicon Valley," which aired on Sunday, without revealing some critical plot twists. You are forewarned.

Though the rest of the real Silicon Valley may have been watching the NBA finals and then crying into their champagne cups (Congratulations to Lebron James and the Cleveland Cavaliers on a truly amazing game 7), HBO's "Silicon Valley" continued its uncanny imitation of modern start up life in Episode 9 – Daily Active Users.

Here's the gist: While the rest of the world is celebrating the phoenix-like rise of Pied Piper with over 500,000 app downloads, Richard Hendricks (Thomas Middleditch) is fretting over another metric. The daily active user metric for Pied Piper is shockingly low (less than 20,000). Only Hendricks and Jared Dunn (the lone business person - performed by Zach Woods) know this metric and are palpably scared by its implications.

They reveal this secret to Monica Hall (their venture capitalist – performed by Amanda Crew) and she helps create focus groups so that they can understand why their daily active users are not growing.

Focusing on the right metrics is what determines triumph or disaster in Silicon Valley. One needs to differentiate between vanity metrics which are thrown around to impress neophytes and core metrics which indicate true long term sustainability. App downloads and total numbers of users are vanity metrics for mobile startups.

The real aficionados focus on core metrics centered about user retention. When evaluating mobile startups, we at Menlo Ventures, focus on 30 day and 60 day retention numbers i.e. If 100 users joined your website or downloaded your app on day 1, how many of them are still active on day 30 and day 60.

A famous case study in the consumer internet space was between Friendster and Facebook. Friendster was the first and leading player in the social networking space. It had strong early buzz, marquee venture capitalists, and strong viral growth. However, its retention was poor both due to their technical challenges as well as lack of features.

Facebook, on the other hand, had incredibly good retention and understood the value of staying abreast of its users. When Facebook saw its users move to the mobile platform, it made brave and transformative acquisitions such as Instagram and WhatsApp.

One of the reasons Menlo invested in Uber very early was the off the chart retention we saw in its user base. Uber users were uber engaged and stayed with the app over time and in some cases increased their usage.

In the SAAS space, the vanity metrics are ARR (annual recurring revenue), MRR (monthly recurring revenue) and number of customers, while the core metrics are net revenue retention and payback period. In marketplaces, the vanity metrics are gross merchandise value (GMV) and revenue growth rate while the core metrics are the ratio of customer acquisition cost (CAC) to life time value (LTV) and cohort retention.

When it comes to metrics, it is worth remembering the old adage : Not everything that counts can be counted, and not everything that can be counted counts.

Commentary by Venky Ganesan, a managing director at Menlo Ventures and the chair-elect of the National Venture Capital Association (NVCA). Follow him on Twitter @venkyganesan.

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