Question: How can you tell that a unicorn startup is in trouble?

Answer: When it starts conjuring up make-believe metrics to tout success/traction.

Take Hike, for example.

In August 2016, the instant messaging startup founded by Kavin Bharti Mittal raised $175 million. The funding round was led by Chinese behemoth Tencent and Taiwanese manufacturing company Foxconn at a valuation of $1.4 billion. At that time, Hike was only four years old. It was the fastest Indian startup to enter the exalted unicorn club (startups with a valuation of $1 billion or more).

Since that euphoric high, though, the company has largely flattered to deceive.

In a recent blog post, Mittal laid out a new metric for the company—DAU LTV (daily active user lifetime value). According to the company, this metric attempts to answer the following question:

“What % of our user base comes back to our app for how many days in a 7 day period?”

At first glance, “DAU LTV” might sound like a fair metric for a social network/instant messaging company, but it is meaningless at best and grossly misleading and disingenuous at worst.

Why so?

Individually, DAU (daily active users) and LTV (lifetime value of a user) are by themselves excellent and well-regarded metrics. DAU is an absolute figure that reflects user engagement while LTV is usually a dollar figure that attempts to capture how valuable each user is to the company. But combining the two is like cross-breeding a chimpanzee and a goldfish—it is neither meaningful nor desirable. What’s more, the dimension that this combined metric is said to measure—percentage user engagement over a period—is neither goose nor gander, and has little to do with DAU or LTV.

More importantly, this metric fails the basic test of every good metric. The value of a metric is to provide a ready reckoner of a company’s health—a short-hand to capture and represent its trajectory. Against this requirement, DAU LTV neither informs nor does it capture the company’s health. If anything, it provides a misleading picture of the same.

How so?

In his blog post, Mittal claims that they have “a tremendously active platform” as “a majority of users come back to the app > 5 days out of 7”. Ostensibly, this metric will further rise to show ever greater levels of engagement. But what this figure obfuscates is that the primary reason for showing a high level of engagement is that users are abandoning the platform. In the 18 months since its last funding round, Hike’s daily active users (DAU) metric has fallen by a whopping two-thirds—from 23 million to 8 million, according to app market tracker App Annie.


Network effects


The first set of people leaving a social network are typically the marginal users—folks who hardly use the platform.

AUTHOR

Sumanth Raghavendra

Sumanth is a serial entrepreneur with more than eighteen years experience in running startups. He is currently the founder of Deck App Technologies, a Bangalore-based startup attempting to re-imagine productivity software for the Post-PC era. Sumanth’s columns appear regularly in leading publications. He holds MBA degrees from the Indian Institute of Management, Bangalore and Thunderbird, The American Graduate School of International Management, USA.

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