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 a 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, the 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.
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.
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.
The first set of people leaving a social network are typically the marginal users—folks who hardly use the platform. This continues progressively until the only users left are the most loyal ones.
Given that these users are, in any case, the most engaged on the platform, metrics such as a number of visits and time spent would naturally be the highest.
So, when the company says that “the average time spent is about 25 minutes, with the best users spending close to 40 minutes”, it obfuscates the fact that this metric is high because the overall user base and engagement is dwindling.
In contrast, the metrics that the company hasn’t announced publicly actually gives a truer picture of the state of the company.
The overall user base isn’t just dwindling. It is hemorrhaging at an alarming rate. According to App Annie, in addition to the sharp fall of DAUs, monthly active users (MAUs) have declined by more than half—from 37 million to 18 million in the same period.
Not only are these numbers alarming in absolute terms, but they are also alarming in percentage terms as well. The current ratio of DAU to MAU (8 million out of 18 million is 44%, a marked decline from the 62% (23 million out of 37 million) it was at eighteen months back. Even among the users who are still on the platform, usage is falling.
The frightening part for Hike is that it could fall further still.