How to fool VCs into thinking you have traction - Part 1,2,3, and 4
from:
http://andrewchen.typepad.com/andrew_chens_blog/2007/05/how_to_fool_vcs.html
http://andrewchen.typepad.com/andrew_chens_blog/2007/05/how_to_fool_vcs_1.html
http://andrewchen.typepad.com/andrew_chens_blog/2007/05/how_to_fool_vcs_2.html
http://andrewchen.typepad.com/andrew_chens_blog/2007/06/how_to_fool_vcs.html
How to fool VCs into thinking you have traction, Part 1
In the Web 2.0 world, people love to quote user numbers, whether they are 50k or 50 million. These numbers are incredibly valuable, as they drive press buzz and even venture capital valuations!
Web statistics are often meaningless
At Revenue Science, a company that taught me everything I know about advertising and much more, I helped strike a deal with Nielsen which got me a bunch of deep understanding about measurement on the web. The truth of it is, there are deep nuances in the way that people use and quote statistics on the web, particularly when it comes to issues like “unique users” and “pageviews” and “sessions,” which are terms without standard definitions. I recently wrote about Alexa, which goes into some of these issues, which you can read: Are you misusing Alexa numbers? (probably)
Lies, damned lies, and web statistics
In the current Web 2.0 market, you can pretty much say the following:
User Traction = $$$
I guarantee that if you have 100k users, are showing some growth, you can raise venture money right now. And in fact, your page stats will serve as the “comp” to value your company. Thus, it becomes very important to understand how to represent your site’s statistics - failing to do so will cost you real money.
Future blogs on this topic
Just off of a quick brainstorm, I have a couple ideas for what I want to write about. They are included at the end of this blog. In analyzing each technique, I’ll try to answer the following questions:
- How does this technique help you bend the rules?
- What should the stats really be?
- How do you ask the right questions to see past the distortion?
I will write about the following techniques:
- Widget pageviews versus destination site pageviews
- Automatic page refreshing
- “Standards” and metrics like date ranges
- Counting hits versus pageviews versus ad impressions
- Search engine marketing
- SEO and page proliferation
- TechCrunch and other one-time traffic spikes
I’ll write the first one before Monday.
Shoot me a note at voodoo [at] gmail [dot] com if you think I’m missing any interesting techniques, or if you have questions or comments.
How to fool VCs into thinking you have traction, Part 2
In my last blog, I argued that that web stats are often meaningless, and can be used to fool people (in particular VCs) into thinking that you have traction when you really don’t.
In this first blog, I’m going to talk about Widget pageviews versus destination site pageviews.
Here’s what you say
When people ask you what kind of traction you have, this is what you say:
“Last month, we got 30 million pageviews and 5 million unique users.”
These are great numbers! You can then show them a graph that looks like a hockey stick, and have people multiplying CPMs by the pageviews to get big revenue numbers.
The reason why this argument is so incredibly compelling is that it’s easy to think that big numbers equals big traction. Between that and showing them a hockey stick graph, it’s easy to get seduced into thinking you have a huge company right away.
What’s weird with these stats?
Although these numbers can look great on paper, they represent a potential landmine for people who aren’t doing their math.
What’s misleading?
Ultimately, a widget pageview is not the same as a pageview on your site.
When you tell someone that you have 30 million pageviews on your site, it’s valuable for a number of reasons:
- It shows that users are engaged with your property
- You own real estate on your property where you can place ads
- Normal “comps” to calculate value, like multiplying against a CPM or calculating a $/user value, all sounds great
The problem is that for a widget site, you have the opposite reaction:
- Users may not be engaged with YOUR property, they are engaged with MySpace’s
- You don’t own any real estate to place ads - and if you did, they might cut you off
- You can’t multiple the pageview numbers by standard revenue multiples, since the pageviews and users may not really be yours in the first place
That sucks! That means that the % of users that exist in widget form may never be monetized - or if it is, it will be at a substantial discount to your CPMs. For more on widgets ad impressions, I wrote a previous blog on the topic called “Widgets = Ad Networks”.
How do you figure out the truth?
To avoid being seduced by the huge numbers, just ask the simple question:
How much of the 30 million in traffic comes from widget pageviews versus pageviews on your destination site?
If you get them to answer that breakdown, then you can ask a couple follow-on questions to show that you get how widgets fit into their marketing strategy:
- How well are you retaining users on your destination site? How often are they coming back?
- Where are the widgets placed? Are you concentrated on one partner? (uh oh!)
- How much of your destination site traffic comes through links on your widget?
- What happens if your widgets all go away? Does your destination site still survive?
- What are the CPMs on your destination site?
- Do you have ads on your widget? If not, do you plan to? How will the underlying platform respond to you monetizing their traffic?
Ask these questions, and you’ll figure out how dependent they are on their potentially hostile partners. Furthermore, you’ll figure out a bunch on how smart they are about “quality of traffic” and the difference in monetization rates between their destination sites and their widget business.
Conclusion
Overall, this is a very effective way to fool people into thinking you have a lot more traction than you really have. A lot of social networking sites have between 50-150 pageviews PER SESSION. If you can pass these pageviews off as your own, you are probably going to inflate your valuation by 3-5x. Pretty sweet.
How to fool VCs into thinking you have traction, Part 3
This is the 3rd article in a multi-part blog. Here are quick links to Part 1 and Part 2.
Today, we’re going to talk about using automatic page refreshing and other navigational tools to generate extra pageviews for every user, whether or not they are really using the site.
Here’s what you say
When people ask you for what kind of traction you have, this is what you say:
“Last month, we got 30 million pageviews - and wow were people engaged. We had an average of 40 pages per session!”
These are great numbers, particularly the engagement factor of many pageviews in the session. These are the kind of stats VCs are looking for when they think about the scarcity of attention. This is particularly true when you show them the hockey stick that’s driven by all these sticky pageviews.
If you need an example of why VCs value stickiness, just check out the excellent blog from First Round Capital on the subject, called “Catch and Release Business Models”. Basically, their view is that more pageviews per session is a proxy for more passionate users, which means more viral, and better growth, etc.
What’s weird with these stats?
Of course, these stats could look great on paper, but in fact they be caused by a number of negative factors which have been documented in the past, particularly two:
- Inefficiently designed navigation that causes pageviews
(See the MySpace analysis, called “The Click Factory”) - Automatic page refreshes which generate garbage pageviews
(See the analysis on Drudge report in Valleywag)
In both of these cases, users are NOT more engaged, yet generate garbage pageviews that are hard or impossible to monetize. So while a simplistic analysis would just multiple the 30 million pageviews by a comparable CPM, the smart money would figure out how sticky or wasteful the pageviews are, and discount it accordingly.
The second problem of automatic page refreshes is a particular problem for news sites, where it’s gray-line justifiable. Oftentimes, this encourages people to stretch it a little further than they need.
On the flip-side, of course, this is the hidden downside of heavily AJAX-y sites that do everything very efficiently. Realize that early on in the process, a site like that might be decreasing their overall pageviews by close to 50%. That’ll generate a huge hit to the startup’s valuation. It’s advantageous for everyone to be educated on this topic, and the pluses and minuses.
How do you figure out the truth?
To understand if these numbers are being inflated, you really have to break down the source of the pageviews on the site. You should ask:
“When users come to your site and expend 40 pages per session, break down what is happening on the 40 pages. What pages are spent on the automatically refreshing news page, versus commenting, versus other activities on the site?”
You typically want to make sure you are separating engagement from the stickiness of the site. Some of this stuff cannot be faked. For example, here are questions that go directly to stickiness:
- How many users come back every day? Every 2 days? Every week? Every month?
- How long do you retain users over time?
- What percentage of your registered userbase is active?
- How many friends do most people have? How many articles do your users forward on?
If you ask these questions, you’ll get much more information on how people use the site, rather than relying on a simple metric like pageviews/session. You’ll also get a good understanding of how well they can interpret past their metrics into the behavior of the users, and why the users are acting different ways.
Onwards…
In my next article, I’ll be covering how people fiddle around with the definitions and standards around pageviews, uniques, and other numbers to inflate their numbers. Stay tuned!
How to fool VCs into thinking you have traction, Part 4
OK Go with point #3
Finally, here’s point 3 of a multi-post series on the question, “How can you fool VCs into thinking you have traction?” Here are links to older posts:
- Introduction
- Widget pageviews versus destination site pageviews
- Automatic page refreshing
- “Standards” and metrics like date ranges
- Counting hits versus pageviews versus ad impressions
- Search engine marketing
- SEO and page proliferation
- TechCrunch and other one-time traffic spikes
“Standards” and metrics like date ranges
Today, we’re going to talk about manipulating standards and metrics - in fact, let me roll in hits versus pageviews and ad impressions, since it’s all part of a similar issue. Basically this sleight of hand has to do with the fact that people treat $0.99 as much cheaper than $1 when they are both only a cent off. So if you pick the right metrics to measure yourself by, you can get a big boost in credibility.
Here’s what you say
When someone asks you what kind of traction you’re seeing, say something like this:
“Since we started public beta, we’ve served over 300 million ad impressions on the site”
I also love “peak” numbers or “run rate” info:
“We currently have a peak run-rate of 240 million pageviews”
This sounds great right? It’s actually more complicated than that.
What’s weird with these stats?
Even though they are a bunch of equivalent numbers, people really perceive the bigger numbers a lot differently than the smaller ones.
What’s misleading?
People don’t have a good sense of the ratios to translate between these numbers - some numbers sound bigger than they really are!
What’s a typical set of ratios? Every site is different, but these would all be reasonable:
- 1 registered user = 10 unique users
- 1 user = 10 pageviews
- 1 pageview = 2 ad impressions
- 1 pageview = 10 hits (or transactions)
- 1 dollar = 1000 ad impressions
What this means is that rather than giving a number like 500k registered users, you could in fact give a number closer to 500k x 10 x 10 x 2 = 100 million pageviews. And if your site is growing 20% a month, growing 500k users 20% a month is a lot less impressive sounding than 100 million pageviews growing 20% a month.
Even worse is giving someone a dollar amount for your advertising. 100 million pageviews doesn’t sound so great when it’s monetizing at $1 CPM or less.
Another way to compound this is by giving big numbers based on non-fixed time intervals. For example:
- “We’re hitting a run-rate of 100 million pageviews”
- “Our peak run-rate is 200 million pageviews”
This also includes what I wrote about earlier with “Since we did X, we got Y.” It’s very confusing what these numbers entail. If you wanted a great peak run-rate number, just take the HIGHEST number of pageviews you’ve ever had in ANY time interval - let’s say the 10 minutes right after you get a Techcrunch spike, and multiply that out to a month. You’d get a ridiculous number.
How do you figure out the truth?
It’s hard to figure this stuff out, but ultimately you want to heavily bound the problem. Rather than waiting for them to spit out a crazy metric, instead you should ask a very specific question:
“In the last month, what did your analytics tell you in terms of # of pageviews to the site?”
Asking a question like that, and not accepting a cryptic number, will give you the best chance at understanding what’s really happening on their site.
Ideally, you want to be able to open up their metrics and understand:
- How long is the average session length?
- How many unique users come to the site per month?
- How many pageviews did the site receive?
- How many ads are on each site?
- What’s the average CPM of the site?
The trick, of course, is understanding what typical metrics might look like for each of these.
The best case scenario is when you’re doing something a little weird and not a typical consumer internet site. For example, if you have a publisher ad network, you’d roll up a bunch of stats from sites you really don’t own or control. Or just disclose certain stats (like peak stats) but not the rest.
