Are online start-ups the next Facebook?

2013-12-01 14:00

A growing group of social and mobile web services are poised to become the next Facebook – just ask them.

Online start-ups with eye-popping statistics that purport to show their popularity have captivated the attention of the media and investors.

As measures of their success, these companies boast of everything from skyrocketing page views and user sign-ups to shared digital photos.

But unlike the financial numbers used to evaluate more mature companies, the so-called vanity metrics now in vogue are largely self-reported and often vague enough to defy definition.

With valuations for high-flying start-ups hitting nosebleed levels, some hear echoes of the obsession with “eyeballs”, or raw numbers of website visitors, that defined the dotcom boom of the late 1990s but quickly proved illusory.

The issue came into focus last week when Snapchat, the hot mobile photo and video messaging start-up, announced that its users send 400?million “snaps” per day, just as reports surfaced that it had turned down a $3?billion (R30.6?billion) acquisition offer from Facebook.

The offer shocked many, given that the company, which lets smartphone users send vanishing pictures to each other, does not have any revenue.

Some also wondered what the 400?million snaps actually referred to and how they compared with the amount of photos shared on Facebook.

Of course, 400?million of anything is a big number and a sign that the company has achieved some level of success.

But according to Joe Beninato, a Silicon Valley entrepreneur, a single metric alone might not tell the whole story and could even mask problems, such as a high user churn rate.

Even long-standing web traffic metrics, such as page views and unique visitors, remain surprisingly open to interpretation, owing to divergent measurement techniques and standards.

For web and mobile start-up companies, proving robust growth in users and time spent with the product is critical to attracting media coverage, recruiting talent and securing funding.

Venture capitalists, who typically evaluate hundreds of start-ups every year, say they know how to cut through the superficial metrics to find out how a company is really doing.

They look at the ratios of daily users to weekly and monthly users to get a feel for how many repeat users a company has.

They strip out growth that comes from unsustainable practices, such as online services that tap into a user’s list of contacts to send “spam” messages, and they try to determine how “viral” a service is by measuring how many of a user’s friends join.

Consumer advocates fear less sophisticated investors could easily be misled, but even experienced investors can make mistakes.

Viddy, a social-video app, raised $30?million in funding last year as investors jostled to get a piece of the company that was at one point adding more than 1 million new users a day.

An investor in Viddy said its hypergrowth was mainly due to being one of the first video apps to take advantage of new distribution features on Facebook. But when Facebook suddenly tightened that distribution channel, Viddy’s momentum came to a screeching halt.

David Cowan, a partner at Bessemer Venture Partners, said some metrics really did have value, pointing to his firm’s decision to invest in professional social network LinkedIn six years ago.

The fact that many LinkedIn users were inviting their friends to join the service, and that LinkedIn user profiles were appearing high up in search results on Google, suggested that the service was spreading in a meaningful way.

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