This post was originally published on IsraeliNYCStartups
A few months ago a colleague and talented entrepreneur with a successful early stage social startup, was faced with a dilemma. With a small team and seed funding he had to focus either on growing his usage base or on experimenting with ways to improve engagement. Doing both was not an option and so he reached out for advice.
That triggered a lively discussion. I was reminded of that discussion reading this story about Homejoy last week but let me step back and share my view first:
Would you attend a 1,500 complete strangers party or a 150 co-workers/neighbors/classmates party?
Most social networks, whether Myspace back in the days or Facebook, Instagram, Twitter and Quora these days, were initially driven by a small group of highly passionate users. Their engagement impacted others. When i joined Quora their user-base was relatively small, but content was relevant enough to get me to stick around and contribute Logically if you find a site/mobile app/service engaging you are likely to invite others. If you do not find it engaging, no matter how much the company invested in growth, reputation will catch up.
Financially If you haven’t addressed engagement, you acquire users quickly but convert only a small percentage.
The result – high effective acquisition cost. The piece above about Homejoy pictures a company that was focused on growth, through steep discounts and aggressive promotions, yet not able to convert most of that traffic to a returning customer base. More of their users never made a second reservation. Life Time Value (LTV) wasn’t enough to compensate for the high acquisition cost.
Airbnb, the $24B peer-to-peer rental marketplace, is another great example. Back in the early days things were less rosy. Halfway through Y-Combinator, their user base and inventory grew nicely through events like SXSW, the Democratic Party Convention in DC and the presidential inauguration but most users never made a second reservation. Revenues were flat at about $200 a month. In NY they had 40 listings yet only 15 bookings a month. At that point, Paul Graham, Y-Combinator’s co-founder, convinced them to take a trip to NY, DC and Denver and visit their customers.
Their insights about the importance of visually appealing photos and reviews was a turnaround point for the company. They experimented with professional photographs and reached out to members encouraging them to write reviews. That led to a significant increase in engagement. The rest is history.
In summary, i believe that for early stage startups engagement drives growth but not the other way around.
P.S Others, like Jeff Jordan from Andreessen Horowitz, don’t share my view. Jeff believes that growth is king.