--:-- Andrew Chen: One of the things that you see is that people end up using these products very differently because the kinds of users that you're getting are changing over time. You know, when you look at something like Rideshare, you know, all the early cohorts are basically people in urban areas. And then these days, all of Rideshare is more like suburban or rural folks because, you know, you've saturated all of the center. And so what you tend to see is as you acquire your, you know, folks, you know, your core demographic out, that actually ends up showing up in the engagement. And so, you know, going back to the natural like kind of gravity to the whole thing, this gravity also hits the engagement side of things as well. And then ultimately the LTV, because your users are typically getting, you know, kind of less valuable. It may take years to see this kind of play out, but that's kind of the natural, you know, law of things. And there is a progression in these, and particularly the ones that are really successful. Early on, it's all about getting users. I mean, just like users, users, users. If you're wildly successful at doing that, you run out of users. Or, you know, you start running low on users, and you have to go to engagement. So Pinterest has a very high-quality problem right now. Most women in America have downloaded the Pinterest app. Oh, yeah. I've had it for years. So some growth can come through, okay, there are some number of women who've never heard of Pinterest somewhere in the country. but much more so they need to engage and re-engage the existing audience. I mean, we love engagement from an investor standpoint because it's just, you know, It shows stickiness. You can often hack your way into new users. It's really hard to hack your way into true engagement. Keeping that. If someone's spending 20 minutes, you know, a day on your site, you know, Pinterest and OfferUp, the major investment thesis was, oh my God, look at that engagement, you know, kind of thing. And if they can scale the user base, it's a beautiful thing. Right. What we mean by engagement is actually interacting with them and seeing their activity. Because to Andrew's three points of acquisition, engagement, retention, the third piece is keeping them. The way that we'll often analyze this is looking at cohort analyses. Yes. Where we'll look at kind of each batch of users that's joining in each week and really start to dissect like, well, how active are they really? And to compare all these cohorts, you know, over time, you're basically putting the users that come in from a particular timeframe, let's say it's a week, right? And you're putting them into a bucket, right? And what you're doing is you want to compare all of these different buckets against each other. And so what you typically do is you look at a bucket of a cohort of users, and you say, okay, well, you know, once they've signed up the week after, how active are they? And what about the week after that? And the week after that, and you kind of like can build out a curve. And it just turns out that these curves, once you've looked at enough of them, surprisingly, human nature, they all look kind of the same. I bet. They kind of all kind of curve down. And for the good ones, they start to flatten out and they plateau. And then for the really good ones, they'll actually swing back up and people will come back to the surface. What you want to do is you want to compare the various cohorts against each other in time to see if you can spot any trends on how the usage patterns are increasing or decreasing. when you add a new layer to layer cake, you know, you might unlock a bunch of new behavior. You might unlock a bunch of new frequency that didn't exist before. Or alternatively, over long thresholds of time, people tend to become less active as you move out of your core segment. The cohort graduates. Whether or not a specific cohort of users flattens out is really important, right? Because if you're in a world where they kind of slowly degrades and then all of a sudden it'll actually go to zero, that means that you're naturally always kind of filling up the bucket. You know, you kind of have a leaky bucket, you're constantly filling it up. And what happens is that gets progressively harder as you, because, you know, if you want to keep your overall growth rate, because that means you have to double, triple, quadruple your acquisition in order to, you know, counteract for that. One growth accounting equation that's, you know, often thrown around is that your net MAU, so your net monthly active users equals all the new people that you're acquiring, right? Minus all the people that are churned, right? And then plus all the people that you're resurrecting, you know, re-engaging, re-engaging, exactly, that are coming back after they've churned. And so what happens is for a new startup, you are completely focused on new users because you don't really have that many users to churn. And over time, as you get bigger and bigger and bigger, what you find is that your churn rate starts to, you know, it's a percentage of your actives. And so, you know, the evolution of most of these companies as they're getting bigger tends to start with acquisition, then focus much more on, you know, churn and retention, and then ultimately also to layer in resurrection as well. And the cohort curves have a couple other features that I love. But usually in marketplace businesses, the best models are built off of the cohort curves. Because you have to understand that degradation and where it goes. Using cohorts really give you a sense of, are there network effects? And network effect is the business gets more valuable the more users that use it. If it gets more valuable, your newer cohorts should behave better than your early cohorts. Why is that? Because the service is more valuable given how it airs. So an open table, if there's 10 times more restaurants, you're going to get a whole lot more reservations per diner because you were serving more of the need. So the open table cohorts would climb up and get more attractive over time versus, you know, we talked about typically they tend to degrade over time. If you've reversed the polarity and they're growing over time, it means you've made the business more valuable and then you start projecting forward. Okay, what a better way to know the business is actually more valuable than thinking it's valuable and bleeding your own man. In a network effects business, we always ask, show us the cohorts. Everyone asserts, I'm a network effect, I'm a network effect. But when you say, show me the data, cohort curves are- Show me the money is now show us the cohorts. They don't lie. The other really interesting part is segmenting it. I was about to actually ask you, what are the buckets of cohorts? Are they all demographic data? For a bunch of hyper-local type businesses, the reason why segmenting it based on market geography, why that's so valuable, is because then you can compare markets against each other. You can say, well, you know, this market, which has much more density in terms of the number of scooters, behaves like this. And you can start to draw conclusions, you know, sort of a natural A-B test in order to do that. And I think the similar kind of analysis you can do for B2B companies is for products that have different size teams using it. If you have a really large team that are all using a product well are they all using the product more as a result And let compare that to something that maybe only has a couple right And so this way you can start to kind of disassemble you know the structure of these networks and do they actually lead to higher engagement Slack would be a perfect example of that. You know, just if you have five people in the organization using Slack, you get one use curve. If you have, you know, if the organization, it's the operating system for the organization, you have a very different curve. Though it's not just an accident. You have to sort of architect it, not just expect like serendipity to fall into place. So after you get the new users, the way that you have to think about it is around quality, right? You have to make sure that the new users turn into engaged users. One of the things people often talk about is just sort of this idea of like an aha moment or a magic moment where the user really understands the true value of the product. But often that involves a bunch of setups. So, for example, for all the different social products, whether that's Twitter or Facebook or Pinterest, et cetera, you have to make sure that when you first bring a new user in, they have to follow all the right people. They have to get – It's like the onboarding experience. Which, by the way, isn't just signing up, but it's actually, you know, doing all the things to get to this like aha where you're like, oh, I get this product. It's for me. And once you get that, then they're kind of, then you have the opportunity to keep them in this engaged state over time. Is that really such a thing that there is like an aha moment or is it sort of like a cumulative? A lot of the later users on Facebook came because everyone else was already there. Is this only tied to new users? In the case of Facebook, actually, the fact that everyone was already there makes the aha moment that much more powerful, right? Because all your friends and family, they're already there. Your feed's already full of content. And the first time that you see photos that maybe, you know, someone that you went to high school with, right? Like that is like, whoa. That's actually what happened to me. I was so excited when I saw an old friend, right? Right. Yeah, exactly. And so what that means is like you get the product. And then afterwards, you know, when you actually are getting these push notifications or emails that are like, hey, it's someone's birthday or, you know, whatever. like you've internalized what that product is. And, you know, this moment is different for all sorts of different companies. I've always heard this referred to as the magic number. When you show up and it's a blank slate, it's like, what is this about? But they would drive you maniacally to, you know, follow people because when you got to their magic number where they had statistically correlated the number of followers with long-term engagement and retention, they would kill you to get you there doing what felt like a natural acts of like, yeah, you log on, follow, and you say no, and say yes. But when they got you there, it kicked in and the service then quote unquote worked for you. A lot of the entrepreneurs I work with are trying to figure out what is my magic moment that then creates the awareness of the value problem. So take the example of Pinterest. Pinterest, when it goes to a new market, first of all, they figured out they need a lot of local content to make it compelling to local users. The U.S. corpus of images is helpful in international markets, but isn't sufficient. You're right. If I'm Indian, I want saris. I don't only want skirts, which you may not be able to wear in certain regions. Exactly. I haven't worn a sari in North America in a long time. But then once you have the content set, then you have to get compelling information to that individual in front of them, which you don't know the individual when they walk in the door. the faster they do that, the more quickly, the better the business performs, engagement goes up, retention goes up, and it works. So different entrepreneurs have to figure out what is that? What experience do they want to deliver where people get it? And then how do you engineer your way into delivering it? Okay, so the way I've kind of come up through acquisition, and you've gotten new users, they get the product, you even have hopefully a way to measure that and see and track it over time. Do you want to then go into trying to get different users? Do you take your existing users. One of the things that we covered very early on is that with SaaS, you always want to try to take existing users and upsell them because it's way more expensive to acquire a new customer in that context. I mean, of course, you want to grow your customers. How does this play out in this context? Like what happens next? A lot of companies, it's a progression. So almost all the early activity in a company is, okay, how do I get the users? As you get users, you get more and more leverage from efforts at activation and retention and engagement. So use Pinterest as an example. Again, a very high percentage of women in America have downloaded Pinterest. Then the leverage quickly goes into, okay, how do I keep them engaged, reactivates the one who disappears. And, you know, their acquisition efforts in the U.S. get de-emphasized and all the leverage is there, except as they're going international, they're still in that acquisition part of the curve. And so I think the leverage changes over time based on the situation of the company. Facebook hasn't had any users in the U.S. forever because they have them all. This kind of goes back to this portfolio approach to thinking about your users. Yeah, once you have an active base of users and customers, what starts to get really interesting is to really analyze what are the things that actually set that group up to be successful, really long-term sticky users versus what are the behaviors and profiles where users aren't successful, right? Do you actually throw your data science team on it to figure out all the different weights for both behavioral as well as the demographic and sort of profile-based stuff on there. And so one of the first things that you figure out is that each one of these products actually has this ladder of engagement where oftentimes new users show up to do something that's valuable, but potentially infrequent. And you need to actually level them up to something that happens all the time. For example, when you first install Dropbox, the easiest thing that you can do is you can use it to just sync your home and your work computers, right? And that's great. But really, the way to get those users to become really valuable is for them to start sharing folders at work with their colleagues. Because once they have that and people are dragging files in, you know, they're really starting to collaborate on things. That's like the next level of value that you can actually have on a daily basis versus this thing that kind of is in the background that's just syncing your storage. So what are some of the things that people can then do to move those users up that ladder of engagement? Step one is really segmenting your users into this kind of engagement map. Oftentimes, you'll see this visualized as a kind of state machine where you have folks that are new, you have folks that are casual, and you want to track how much they're moving up or down in each one of these steps. And then once you have that, then the question is, okay, well, great. How do you actually get them to move from one place to the other? First, there's like content and education. They need to know kind of like in context that they can actually do something. So for example, if you can get your users to set their home and work for transportation product, then you can maybe like figure out, you know, okay, should I prompt them in the morning to try their ride based on what the ETAs are, right? Like in the app, there would be like some kind of notification. Like lifecycle messaging factor in there. The second is, of course, if your product has some kind of monetary component, then you can use incentives. 10 bucks off your next subscription, if you do this behavior that we know for sure gets you kind of to the next step. And the third thing is really just like refining the product for that particular use case. But maybe there are certain kinds of products that are transacted all the time. And so you maybe want to like waive fees or give some credits. You do something in order to get people to kind of get addicted to that as a thing. And the really interesting thing is the frequency with which something's consumed. I mean, eBay had enormous levels of engagement early on for a commerce app in particular. people would spend hours just browsing because early on it was about collectibles and it was about people's passion. So if someone's passionate about depression, air, or glass, they will spend hours if you give them that depth of content to say, oh my God, I just found the perfect item. OpenTable and Airbnb are both typically much more episodic. Most people don't dine at fine dining restaurants with high frequency. Our median user dines twice a year on OpenTable. And so that It has completely different marketing implications and user implications. Measurement is probably even more important in the engagement retention thing because we got our data scientists to understand the different consumer journeys through our product. And then we tried to develop tactics to accelerate the journeys we wanted and limit the journeys we don't want. But in order to develop your strategy, you really need to understand how your users are behaving at a really refined level. So what are some of the engagement metrics? One really important area is frequency. Just how often are using the product, regardless of the intensity and the length of the sessions and all that other stuff, just literally just frequency of sessions. We might often ask for a daily active user divided by monthly active user ratio. And that gives you a sense for like how many days is a user active Doubt them out You recently put a post out on the DAU metric Right And when it works and when it doesn There's a lot of nuances around when to apply it and when not to. DAU-MAU was very much popularized by the fact that Facebook used it, including in their public financial statements. And it really makes sense for them because they're an advertising business and it matters a lot that people use them a lot all the time, right? Right. It's like counting impressions and being able to sell that to advertisers, right? Exactly. Their products have historically been 60% plus daily actives over monthly actives. And that's very high. You know, you're using it more than half the days in a month. On the flip side, what I was talking about in my essay about this is that Dow Mal can tell you if something's really high frequency and if it's working. But a lot of times products are actually lower Dow Mal for a very good reason because they're sort of just a natural cadence, you know, to the product. Like you're not going to get somebody who is using a travel product to use it more than a couple of times per year. And yet there are many valuable travel companies, obviously. So you're saying don't live and die by that alone. Exactly. Because it really depends on the product you have, the type of nature of use that it has, etc. You just want to make sure that the metric reflects whatever strategy that you're putting in place. If you think that your product is a daily use product and you're going to monetize using a little bit of money that you're making over a long period of time, but your Dow now is low, is like sub 15%, then it's probably not going to work. And then a metric called L28, which is something else that was pioneered certainly early at Facebook. And it's a histogram. And what you want to do is... A histogram is a frequency diagram. Right. Frequency diagram that basically says, okay, show a bar showing how many users have visited once in that month, then twice in the month, and then three times in the month, and then four times in the month. And you kind of build that all the way out to 28 days. Because there's 28 days in the month on average, right? And the 28 days is to remove seasonality. And then related one, obviously, is like L7, right? So just like last seven days. And so what you want to see... So what would this be wows weekly to users? Is that really a thing, by the way? Am I just making that up? Right, yeah, wows at DAO. You just coined it. I know, great. I'm not re-coining retainment. Why not? Right. And so the idea with an L28 or an L7 is the idea that you should actually start to see when you graph this out that there's a group of people who just use it 28 days out of 28 days, right? And that there's a big group of people who use it 27 days out of 28 days, right? And that there's a big cluster. And so that's how you know that you actually have a hardcore segment. And that's really important because in all these products, you typically have a core part of the network that's driving the rest of it, whether that's power sellers or power buyers or, you know, in a social network, the creators versus the consumers. Actually, I've heard this referred to as the smile because the one use is always pretty big. A lot of people show up once. I don't understand what this is and disappear. So that's the one. And then they typically slide down. More people use it. Fewer people use it two days than one, three days than two. Done right, it starts to increase at the end. So you basically get a smile. You just go down. And I mean, that's really powerful. Facebook has a smile. WhatsApp had a smile. Instagram had a smile. If you take a step back, it's a precondition for investing in a venture business, essentially, that there's growth. If it's in market and thing, you want to see growth. But growth by itself is not sufficient. Investors love engagement. So Pinterest, the key driver of Pinterest, it was growing, but the users were using it maniacally. Oh, my God. I think I spent an entire Thanksgiving using Pinterest. It was the engagement that blew my mind much more than the growth. OfferUp has engagement that's similar to social sites like Instagram and Snap. I mean, a commerce site, mobile classifieds, people just sit there and troll looking for bargains. It's a little addictive to see what's nearby that you can buy. Why not? Yeah. So Datamow, Smile, all these metrics are so core to us because a big engaged audience is so rare. And as a result, it's almost always incredibly valuable. And the engagement ends up being very related to acquisition. Because when you look at all the different acquisition loops, whether it's paid marketing or a viral loop or whatever, all of those things are actually powered by engagement, ultimately. Like you need people to get excited about a product in order to share content off of that platform to other platforms in order to, you know, get a viral loop going. And so one of the things I was going to also add on DaoMao and L28 is that they're actually really hard to game, right? Which is fascinating. Whereas growth can be very easy to game. Right, exactly. Yeah, why is that? What's the difference? The typical approach is to say, well, you know, I'm going to add in email notifications, I'm going to do more push notifications, I'm going to do more of this and that. And then automatically, you know, these metrics ought to go up, right? The challenging thing is actually usually sending out more notifications will actually cause more of your casual users to show up because your hardcore users were already kind of showing up, you know, already. And what that does is that'll increase your monthly actives number, but actually not increase your daily actives as much. So I've actually seen cases where sending out more email decreases your DAO Mao as opposed to increasing it. That's really interesting. When you think about this portfolio of metrics, it really tells you a story about people are kind of coming but not really staying. If you get an email or push notification every day, eventually you turn them off and then you just stop. So then you get counted as a Mao for that period of time and then you lose them as a DAO. Acquisition is super easy to game because you can just spend money. Or you've got a distribution hack that works. Early on in the Facebook platform, companies literally got to a million users and it felt like minutes just because there were so many people on Facebook and the ones who were early just got exploding user bases. There were a number of concepts whose mean number of visits was one. They never came back. So you get to see these incredibly seductive growth curves, but our job is essentially to be cynical and just say, okay, we need to go below that because there are a lot of talented growth hackers who can drive growth. I looked at a number of businesses that had tens of millions of users and no one ever came back. This is why engagement is so, so key. So we've talked especially about the fact that growth and network effects are not the exact same thing. Because network effects, by definition, are that a network becomes more valuable the more users that use it. What happens on the engagement side with network effects? What are the things we should be thinking about in that context? Typically, network effects, if they're real, manifest in data. Things like the cohort curves improve over time. Usually there's a decay. With network effects, there often is a reversal where they're growing because it's more valuable. Another smile, essentially. My diligence at OpenTable was I looked at San Francisco, which was their first market, and sales rep productivity grew over time. Restaurant churn decreased over time. The number of diners per restaurant increased over time. The percentage that booked through OpenTable versus the restaurant's own website moved towards OpenTable dramatically. Every metric improved. And so, you know, that's where it both drives good engagement, but also it just improves the investment thesis. The value overall, right. One of the interesting points about network effects is that we often talk about it as if it's a binary thing. Right, or homogenous, like all network effects are equal when they're not. Exactly, right. When you look at the data, what you really figure out is network effect is actually like a curve. and it's not like a binary yes-no kind of thing. So, you know, for example, I would guess that if you plotted the number, if you took a bunch of cities, every city was a data point and you graphed on one side the number of restaurants in the city versus the conversion rate for that city, you would quickly find that when cities have more restaurants, the conversion rate is higher, right? It actually, I'm just guessing. Almost perfect with one refinement, the number of restaurants you have is a percent of that market's restaurant universe. Okay, right. Because having 100 restaurants in Des Moines is different than having 100 restaurants in Manhattan. Makes total sense. So not only that, what you then quickly figure out is that there's some kind of a diminishing effect to these things often in many cases. So for example, in Rideshare, if you are going to get a car called 15 minutes versus 10 minutes, that's very meaningful. But if it's, you know, five minutes versus two minutes, your conversion rate doesn't actually go up. If you can express your network effect in this kind of a manner, then what you can start to show is, okay, yeah, we have a couple new investment markets that maybe don't have as many restaurants or don't have as many cars. But if we put money into them and invest in them and build the right products, et cetera, then you can grow. You can do this kind of same analysis whether you talking about YouTube channels and the number of subscribers you might have Having more videos is better I sure you can show that If you go into the workplace and you start thinking about collaboration tools then what you ought to see is that as more people use your chat platform or your collaborative document editing platform, then the engagement on that is going to be higher. And you should be able to show that in the data by comparing a whole bunch of different teams. Okay. So we've talked about engagement and also how it applies to network effects. are engagement and retention the same thing? I mean, in all honesty, they sound like they would be the same thing. There's overlap. Yeah, there's overlap. Just to give a couple examples. So weather is low frequency, but high retention. Because like, you're actually going to need to know what the weather is. Only once a day. You know, unless you live in San Francisco, you got to check it like 20 times a day. Right, right, exactly. Or if you live down here, you have to check it twice a year. That's true. It's actually the same year round. That's actually what it showed was actually more that generally people didn't really check it that often. However, you are highly likely to have it installed and running after 90 days because that's a reference thing. It's so important. Yeah. Versus if you look at something like games or e-books or, you know, those kinds of products, like really high engagement because you're like, all right, I'm going to get to, I'm going to finish this like trashy science fiction novel that I've been reading. I'm just going to like get to it. But then as soon as you're done, you're like, okay, there's no reason why I would go back and read it again. So the real difference is that engagement obviously varies depending on the product, the type of thing it is, whether it's a weather or ebook. And retention is, are you still using it after X amount of time? And different companies have different cadences. If the average user's twice a year, retention is, did they book annually other businesses or did they come daily? But the model behind retention is completely different and the model behind engagement is completely different. The chart that I'd love to really see is one that was a bunch of different categories. That's retention versus frequency versus monetization. And I think you got to be like really good, at least on one of those axes. So we've done sort of this taxonomy of metrics. We've talked about the acquisition metrics. We've talked about some engagement metrics, primarily frequency. Engagement is also time, not just how frequent someone is, but just how much time do they spend. Time spent on site, on the piece, writing comments, not just page views. I mean, the number of businesses that have great engagement is not high because there are only so many minutes in the day. And so you're just looking for where, okay, they're just passing time and enjoying it. And they both have obvious monetization associated with that behavior. This is why Netflix is so freaking genius, because when they literally invented the format of binge watching, which you could not do, which is, I love it because it's a very internet native concept. I mean, they literally fucked up everyone else's engagement numbers. I think that's one of the narratives on why building consumer products is much harder these days. And do you think it's true or not? Well, because it used to be that you were, you know, what kind of time were you competing for in the first couple of years of the smartphone? You were competing against literally, I'm going to stare at the back of this person's head, or I can use some cool app that I downloaded, right? Versus these days, you actually have to take minutes away from other products. And it's typically other BMS because the top apps are almost all done by Facebook, Amazon, Google, and breaking through just, Mark calls it the first page. The people who are on the first screen are just such the incumbents. And sure, most people have Facebook on the screen and YouTube on the screen and Amazon on the screen. So that competition is a big overhang right now in consumer investing because you have to displace someone's minutes. Yeah, I would add one more layer to that, at least on the content side, which is I think a lot of people make a lot of category errors because they think they're competing with like-minded players. And in fact, when it comes to things like content and attention, you're competing with just about anything that grabs your attention. It's not just other media outlets. It's Tinder. It's Tinder. It's a dating app. It's something else. I'm riding on the train for an hour. I could, you know, see one of my friends on Facebook, watch videos on YouTube. It's actually changes the time blocks. Xerox Park did a really interesting study on micro waiting moments. And they're literally the little snatches of time, like two seconds here and there, that you might be waiting in line or doing something. So you can do a lot of snack size things in that period, which is also another interesting thing to think about for how people engage with. So it's actually funny because there's some businesses that have good engagement where it's one session that goes on for a while, YouTube or Netflix or something like that. There are others that are multiple small sessions. Like a podcast, which you might not finish in one setting. Because it's the micro opportunities. And Google is the best example of this, right? In fact, if you spend a lot of time on Google.com, you know, refining your searches and clicking around, that means actually the service is doing poorly. They fail. Interesting. Their goal is to get you to their advertisers as fast as they can. That's a frequency play and a monetization play ultimately as opposed to an engagement one. And then
