Applying User Growth to Venture Capital

Andrew Chen, a former operator at Andreessen Horowitz, shares a presentation deck he created during his interview process. The deck emphasizes the importance of understanding user growth metrics when evaluating startups for venture capital investment.

The key takeaway is that venture capital investors can use their expertise in growth hacking, user engagement, and growth metrics to understand the quality of a startup’s user growth.

User Growth Metrics: Beyond Vanity Metrics

Chen argues that traditional venture capital metrics are often lagging indicators, making it difficult to predict future growth.

• Instead, investors should focus on leading indicators and conceptual models.
• This involves understanding both Acquisition Loops and Engagement Loops.

Understanding Acquisition Loops

Acquisition Loops are the mechanisms by which a startup acquires new users.

• Examples include: UGC SEO driven loops (like Yelp), paid marketing, viral loops, and partnerships.
• Investors should examine the quality and sustainability of the loops, as well as the potential for improvement.

Key Metrics to Analyze Acquisition Loops

• Acquisition Mix: Understanding the breakdown of signups by channel (organic, paid, viral, etc.)
• Activation Rate by Channel: Assessing the quality of new users based on their conversion rate into active users.
• Platform Risk: Evaluating the dependence on third-party platforms and their potential for change.

Understanding Engagement Loops

Engagement Loops are the mechanisms that keep users returning to a product and interacting with it.

• Examples include: social feedback loops (like Twitter), utility-based loops (like Zillow), and network-driven loops (like Dropbox).
• Investors should examine the strength and effectiveness of these loops, as well as the potential for optimization.

Key Metrics to Analyze Engagement Loops

• Cohort Analysis: Tracking user retention rates over time (D1, D7, D30, etc.).
• Notification Metrics: Evaluating the volume and click-through rates of push notifications and emails.
• Frequency of Use: Analyzing user behavior and identifying potential opportunities for up-selling.

Building a Forecast for Startup Growth

Once investors have a solid understanding of Acquisition Loops and Engagement Loops, they can create a comprehensive forecast for user growth.

• This involves combining the acquisition and engagement data with potential upside scenarios.
• The resulting forecast provides insights into the quality of the startup’s user growth and the potential for success.

Venture Capital and Startup Evaluation: A Holistic Approach

By applying their expertise in user growth, investors can gain a deeper understanding of a startup’s trajectory.

• This approach moves beyond traditional venture capital metrics to focus on the underlying mechanisms driving user growth.
• Ultimately, it’s about making informed investment decisions based on the quality of the startup’s user acquisition and engagement strategies.

Key Takeaways

• User growth metrics can be a valuable tool for venture capital investors.
• Understanding Acquisition Loops and Engagement Loops provides insights into the quality and sustainability of a startup’s user growth.
• By combining data with potential upside scenarios, investors can create a comprehensive forecast that informs investment decisions.