slides for my talk on Startup Metrics for Pirates (AARRR!) at the FounderX conf (Mountain View, May 2016)

1. Startup Metrics for Pirates
@DaveMcClure
500 Startups
http://500.co
http://500hats.com
http://slideshare.net/dmc500hats
AARRR!

2. Dave McClure
Founding Partner & Troublemaker, 500 Startups
00’s & 10’s:
• VC: Founders Fund, Facebook fbFund, 500 Startups
• Angel: Mashery, Mint.com, SlideShare, Twilio
• Marketing: PayPal, Simply Hired, Mint.com, O’Reilly
80’s & 90’s:
• Entrepreneur: Aslan Computing (acq’d by Servinet/Panurgy)
• Developer: Windows / SQL DB consultant (Intel, MSFT)
• Engineer: Johns Hopkins‘88, BS Eng / Applied Math

3. • What is 500?
– $250M under management
– 120+ people / 30+ investing partners / 20 Countries
– 3000+ Founders / 250+ Mentors
• 1500+ Portfolio Co’s / 50+ Countries
– Credit Karma (~$3.5B)
– GrabTaxi ($1B+)
– Twilio ($1B+)
– Wildfire (acq GOOG, $350M)
– MakerBot (acq SSYS, $400M)
– Viki (acq Rakuten, $200M)
– Simple (acq BBVA, $117M)
– Ipsy
– Udemy
– Intercom
– The RealReal
– BarkBox
– Tradesy
– TalkDesk
500 Startups
Global Seed Fund & Startup Accelerator

4. [ This Talk ]

5. Topics
• Basic Concepts of “Startup Metrics 4 Pirates”
• 3 Steps to AARRR: Product, Market, Revenue
• Constructing MVP: Just ONE Feature?
• Design (UX) & Distribution (MKTG)
• Winning = Users, Revenue, Profit?

6. Lean Startup:
Simpler, Faster, Cheaper, Smarter
1. Startup Costs = Lower.
2. # Users, Bandwidth = More.
3. Transaction $$$ = Better.
Building Product => Cheaper, Faster, Better
Getting Customers => Easier, More Measurable
Iterative Product & Marketing Decisions based on Measured User Behavior

7. Changes in Tech Startups
• LESS Capital required to build product, get to market
– Dramatically reduced $$$ on servers, software, bandwidth
– Crowdfunding, KickStarter, Angel List, Funders Club, etc
– Cheap access to online platforms for 100M+ consumers, smallbiz, etc
• MORE Customers via ONLINE platforms (100M+ users)
– Search (Google, Baidu)
– Social (Facebook, Twitter, SnapChat, LinkedIn, TenCent)
– Mobile (Apple, Android, Xiaomei)
– ECom (Amazon, Alibaba, eBay/PayPal)
– Media (YouTube, Pinterest, Instagram, SnapChat)
– Comm (Email, IM/Chat, Voice, SMS, etc)
• LOTS of little bets: Accelerators, Angels, Angel List, Small Exits
– Y Combinator, TechStars, 500 Startups
– Funding + Co-working + Mentoring -> Design, Data, Distribution
– “Fast, Cheap Fail”, network effects, quantitative + iterative investments

8. DO Marketing!
(It’s Not Evil)
• Marketing is Both Qualitative + Quantitative
• Qualitative: Create Emotion, Drive Action
• Quantitative: Measure Results of Action
• Design (UX) & Distribution (MKTG) Matter
• Volume (#), Cost ($), Conversion (%)

9. [Startup Metrics 4 Pirates]

10. Just Gimme the GOOD Metrics.
Users, Pages, Clicks, Emails, $$$...?
Q: Which of these is best? How do you know?
• 1,000,000 one-time, unregistered unique visitors
• 500,000 visitors who view 2+ pages / stay 10+ sec
• 200,000 visitors who clicked on a link or button
• 20,000 registered users w/ email address
• 2,000 passionate fans who refer 5+ users / mo.
• 1,000 monthly subscribers @ $5/mo
the
good
stuff.

11. Lean Startup -> Startup Metrics
• Talk to Customers; Discover Problems
• Progress ≠ Features (Less = More)
• Fast, Frequent Iteration (+ Feedback Loop)
• Focus on Product/Market Fit
• Measure Conversion (compare 2+ alternatives)
• Track Metrics that are Simple & Actionable

12. Discover Customers
(Steve Blank, SteveBlank.com)

13. LEARN BUILD
MEASURE
IDEAS
CODE
DATA
Iterate.
(Eric Ries, TheLeanStartup.com)

14. AARRR!: Startup Metrics Model
Website.com
Revenue $$$
Biz DevAds, Lead Gen,
Subscriptions,
ECommerce
ACQUISITION
SEO
SEM
Apps &
Widgets
Affiliates
Email
PR Biz Dev
Campaigns,
Contests
Direct, Tel,
TV
Social
Networks
Blogs
Domains
Retention
Emails & Alerts
System Events &
Time-based
Features
Blogs, RSS,
News Feeds

15. Startup Metrics for Pirates
• Acquisition: users come to site from various channels
• Activation: users enjoy 1st visit: "happy” experience
• Retention: users come back, visit site multiple times
• Referral: users like product enough to refer others
• Revenue: users conduct some monetization behavior
AARRR!
(note: If you’re in a hurry, Google
“Startup Metrics” & watch 5m video)

16. One Step at a Time.
1. Make a Good Product: Activation & Retention
2. Market the Product: Acquisition & Referral
3. Make Money: Revenue & Profitability

17. Startup Challenges
Startups have problems in 3 key areas:
• Management: Set Priorities, Define Key Metrics
• Product: Build “Right” Features. Measure, Iterate.
• Marketing: Distribution, Distribution, Distribution.
(Search, Social, Mobile)

18. [ Constructing MVP ]

19. Role: Founder / CEO
Q: Which Customers? Problems? Metrics?
A: Focus on Critical Few Actionable Metrics
(if you don’t use the metric to make a decision, it’s not actionable)
• Hypothesize Customer Lifecycle
• Target ~3-5 Conversion Events
• Test, Measure, Iterate to Improve

20. Optimize 4 Happiness
(both User + Business)
• Define States of User + Business Value
• Prioritize (Estimate) Relative Value of Each State
• Move Users: Lower Value -> Higher Value
• Optimize for User Happiness + Business $$$
• Achieve High Cust Value + Low ACQ$ @ Scale

21. What is Minimum Viable Product ?
MVP = F(Customer, Problem, Time or $$$)
• Focus on CUSTOMER
– Qualitative Discovery, Quantitative Validation
• Get to know habits, problems, desires (FUN MATTERS)
– what causes pain? what causes pleasure?
• Ship the simplest, fastest solution that solves the problem;
better or cheaper or faster than the available competition.
• Define 1-5 TESTABLE Conversion Metrics of Value
– Attention/Usage (session time, clicks)
– Customer Profle Data (email, connect, profile)
- Revenue (direct or indirect)
- Retention (visits over time, cohort behavior)
- Referral (users evangelize to other users)

22. Example Conversion Metrics
(note: *not* actuals… your mileage may vary)
Stage Conversion Status Conv.
%
Est. Value
(*not* cost)
Acquisition Visitors -> Site/Widget/Landing Page
(2+ pages, 10+ sec, 1+ clicks = don’t abandon)
60% $.05
Activation “Happy” 1st Visit; Usage/Signup
(clicks/time/pages, email/profile reg, feature usage)
15% $.25
Retention Users Come Back; Multiple Visits
(1-3x visits/mo; email/feed open rate / CTR)
5% $1
Referral Users Refer Others
(cust sat >=8; viral K factor > 1; )
1% $5
Revenue Users Pay / Generate $$$
(first txn, break-even, target profitability)
2% $50

23. [ Getting 2 PMF ]

24. Role: Product / Eng / Design
Q: What Features to Build? Why? When are you “Done”?
A: Easy-to-Find, Fun/Useful, Unique Features that
Increase Conversion (stop iterating when increase decelerates)
• Wireframes = Conversion Steps
• Measure, A/B Test, Iterate FAST (daily/weekly)
• Optimize for Conversion Improvement
– 80% on existing feature optimization
– 20% on new feature development

25. What is Product/Market Fit ?
PMF = F(Customer, Solution, Alternatives*)
• Product / Market Fit occurs when:
– Customers like your stuff better than other options
– Not static, Not optimal – just Local Max F(customers, solution, time)
– make sure you’re moving in optimal direction 2 local max
• Q: what competitive solutions are available?
– … that your customers know about?
– how are you diff/same?
– in ways that people care about? (will pay for)

26. [ Testing 4 AUX ]

27. Discover Meaning
Why Should Users CARE About Your Product?
Kathy Sierra:
“Creating
Passionate
Users”

28. Discover Meaning
Keywords, Images, Call-to-Action
Top 10 - 100 words
• Your Brand / Products
• Customer Needs / Benefits
• Competitor’s Brand / Products
• Semantic Equivalents
• Misspellings
Relevant images
• People
• Products
• Problems
• Solutions
Call-to-Action
• Words
• Images
• Context
• Button/Link
• Emotion
Result
• Positive?
• Negative?
• Neutral (= Death)
• A/B test & Iterate

29. How To Tell if Design/UX is Good?
AUX = F(Customer, Design/UX, Metrics)
• If Users Use Your Product Then It’s GOOD.
– Define Metrics, Measurability for Design / UX
– Focus on Psychology of User
– Relative to Competitive Alternatives (that your customers know about)
– Keep Testing 4 Awesomeness
• RAMP Mktg & $$$ AFTER it’s clear your MVP is:
– Functional = useful for >1 customers
– Awesome (enough, see above)
– Differentiated = better than other stuff availabile

30. [ Metrics 4 ACQ ]

31. Role: Marketing / Sales
Q: What channels? Which users? Why?
A: High Volume (#), Low Cost ($), High Conv (%)
• Design & Test Multiple Marketing Channels + Campaigns
• Seek out channels with positive unit economics, scalability
• Select & Focus on Best-Performing Channels & Themes
• Optimize for conversion to target CTAs, not just site/landing page
• Match/Drive channel cost to/below revenue potential
• Low-Hanging Fruit:
– Blogs
– SEO/SEM
– Landing Pages
– Automated Emails

32. Distribution Platforms
Customer Reach: 100M-1B+
• Search: Google, Baidu
• Social: Facebook, SnapChat, Twitter, LinkedIn, TenCent/QQ/WeChat
• Mobile: Apple (iOS), Android, Xiaomei
• Media: Video (YouTube, FB), Photos (Instagram, Pinterest), Blogs
• Comm: SMS, IM (WeChat, WhatsApp, FB), Skype, Phone/Voice, etc

33. MAARRRketing Plan
Marketing Plan = Target Customer Acquisition Channels
• 3 Important Factors = Volume (#), Cost ($), Conversion (%)
• Measure conversion to target customer actions
• Test audience segments, campaign themes, Call-To-Action (CTAs)
[Gradually] Match Channel Costs => Revenue Potential
• Increase Vol. & Conversion, Decrease Cost, Optimize for Revenue Potential
• Avg Txn Value (ATV), Ann Rev Per User (ARPU), Cust Lifetime Value (CLV)
• Design channels that (eventually) cost <20-50% of target ATV, ARPU, CLV
Consider Costs, Scarce Resource Tradeoffs
• Actual $ expenses
• Marketing time & resources
• Product/Engineering time & resources
• Cashflow timing of expense vs. revenue, profit
ACQ = F(Customer, Campaign, Vol, Cost, Conv)

34. [ What is WINNING? ]

35. Choose #WINNING Metrics
WIN = F(Customer, Usage, Dist, Revenue)
• after MVP functional use, several options:
– better Usage – Activation & Retention (AUX)
– more Users -- Distribution / Acquisition
– more Money --- Monetization
– more Profit — Margin
• understand ACQ$ vs REV$, optimize 4 short-term
– higher volume usually a priority
– costs may change as volume increases

36. Startup 2.0:
“Lean Investor” Model
Method: Invest in startups using incremental
investment, iterative development. Start with
lots of small experiments, filter out failure, and
expand investment upon success.
• Incubator: $0-100K (“Product Viability”)
• Seed: $100K-$2M (“Expand Distribution”)
• Venture: $1M-$10M (“Maximize Revenue”)

37. Investment #1: Incubate
(“Product”)
• Structure
– 1-3 founders
– $0-$100K investment
– Incubator environment: multiple peers, mentors/advisors
• Build Functional Prototype / “Minimum Viable Product” (MVP):
– Concept->Alpha, ~3-6 months
– Develop Minimal Critical Feature Set => Get to “It Works”
– Instrument Basic Dashboard, Conversion Metrics
– Test Cust. Adoption (10-1000 users) / Cust. Satisfaction (Scale: 1-10)
• Demonstrate Concept, Reduce Product Risk, Test Functional Use
• Develop Metrics & Filter for Follow-on Investment

38. Investment #2: Seed
(“Market”)• Structure
– 2-5 person team
– $100K-$2M investment
– Syndicate of Angel Investors / Small VC Funds
• Improve Product, Expand Market, Test Revenue:
– Alpha->Beta, ~6-12 months
– Customer Sat ≥ 6 => Get to “Doesn’t Suck”
– Setup A/B Testing Framework, Optimize Conversion
– Test Marketing Campaigns, Cust Acqstn Channels
• Prove Solution/Benefit, Assess Market Size
• Test Channel Cost, Revenue Opportunity
• Determine Org Structure, Key Hires

39. Investment #3: Venture
(“Revenue”)
• Structure
– 5-25 person team
– $1M-$10M investment
– VC Investors
• Make Money, Get to Sustainability:
– Beta->Production, 12-18 months
– Customer Sat ≥ 8 => “It Rocks, I’ll Tell My Friends”
– MktgPlan => Predictable Channels / Campaigns + Budget
– Scalability & Infrastructure, Customer Service & Operations
– Connect with Distribution Partners
• Prove/Expand Market, Operationalize Business
• Future Milestones: Profitable/Sustainable, Exit Options

40. Q&A?
» Questions?
» Answers: $1
» Correct Answers: $10
» Stupid Look on my face: FREE!