Mind the Gap

In social media, a company’s success and value are driven by its quality and size. The best indicator for quality is engagement — time spent per user per day, and the conversion ratio of active users compared to the total user-base. For most social media companies, the best ratio to use is the DAU-to-MAU ratio (daily to monthly active users). If the ratio is high, it means most users keep on using the network again and again…and they have very little churn.

When it comes to size, it obviously goes “the bigger the better.” But when doing an analysis, one has to be careful to not compare total users with monthly active users or with daily active users. The three metrics are all very different, and it is crucial to understand each of them separately and their ratio against each other.

Consider the following three cases:

Twitter was one of the hottest IPOs in 2013. The stock came out soaring, up 170% two months after its IPO, hitting a high of $70+ per share. At that point, Twitter had 232 million MAUs, growing at +48%, and 100 million DAUs. The 43% DAU/MAU ratio was signaling issues. Also, what the company was not disclosing was the time spent per user.

While Twitter was and continues to be a unique platform for sharing statements publicly, it failed to go beyond that. It is still the best to express yourself to the World, but it is not a good place to share pictures, videos or to read quality content. Hence, the time spent per user was always lagging at below 10 minutes per day. Compare that with Snapchat’s and Facebook’s 30+ minutes per day… (Disclosure: GSV owns shares in Snap)

Also, Twitter’s DAU/MAU ratio further decreased over the years, dropping to an estimated 30-35%. This implies Twitter’s most important audience is less than that of Snapchat, even tough its broader audience (MAUs) is significantly higher. Snapchat, with its highly engaging platform, has a much superior DAU/MAU ratio at above 60%.

Case #2 — for the last two years, SoundCloud has touted itself for having 175 million users, implying it is significantly bigger than rivals Spotify or Pandora, which have 140 million and 77 million users, respectively. However, SoundCloud never specified whether those 175 million users were the total user-base, or its active users. Turns out it has a much smaller number of monthly active users, at just about 45 million. This is a huge disconnect, and implies an enormous amount of churning users. At that level, SoundCloud is not bigger than Spotify, but rather three times smaller. (Disclosure: GSV owns shares in Spotify).

It’s not a surprise that SoundCloud is struggling to find a new investors and had to cut 40% of its workforce and closed two offices last week. Spotify meanwhile continues to thrive, with 50+ million paid subscribers. Spotify has consistently increased its paid user conversion, going from about 25% in 2015 to over 35% this year.

Third case — Slack’s $5 billion valuation might seem crazy if valuing it on the 5M DAUs it reported in January. It implies a $1,000 value per paid user. Meanwhile, LinkedIn with 109 million active users sold to Microsoft for $26 billion last year, implying a $240 value per user.

But Slack’s DAU/MAU conversion is around 80% (assumption is based on our research), implying its MAUs are approximately 6.3M. Accordingly, the value per MAU then is $800.

While still much higher compared to LinkedIn’s value per user, one has to account for the much higher paid user conversion rate, at around 30%. LinkedIn’s paid user base is less than 10% of its monthly active users. Also, Slack users spend significantly more time per day, which is estimated at over 100 minutes per day!

Lastly, Slack’s growth rate is still in the triple digits, implying strong business growth for the years to come. LinkedIn’s monthly active user base was growing at a mere 9% when it was acquired, reflective of it being a mature stage company.

In summary, when trying to value a social media company, it is crucial to understand the underpaying core drivers of the business. Those include time spent per day, conversion rates, and engagement. And always mind when there is a gap — the bigger the gap, the better it might be to short.

The Only Way A US Tech Company Can Win in China

American tech startups and even more established companies competing to become a category leader in China is like European military powers trying to invade Russia during the winter.

It doesn’t work.

Google was slow to realize the rising competitive power of local grown Baidu. Facebook got censored and then largely displaced by Tencent’s WeChat. Uber ultimately bowing out by selling its China unit to Didi. Apple is besieged daily by new Chinese phone makers often with faster specs, and definitely at lower prices (more on Apple later).

Bless Mark Zuckerberg’s heart and his Mandarin skills but it’s going to be very difficult for Facebook to compete in China against Tencent.

The three factors that’s most difficult for U.S. (or really any non-Chinese) company to overcome is different consumer preferences, unfair government intervention, and the aggressiveness in which local competitors work.

Most company’s China strategy should and will end up in something other than growing organically. They can buy as Amazon did when it acquired Joyo for $75M in 2004. Joyo, now Amazon China, generated a reported $3B of revenue in 2016. Or invest as Apple did in Didi. Or create a joint-venture or franchise.

But the only way for a non-Chinese company to win organically in China is to build a BRAND. And not only any brand but one that is ASPIRATIONAL.

The Chinese consumer class is a new one, having made much of its purchasing power in the last two decades. In a mature market, people’s mentality is to buy the best product at the most affordable price. The Chinese psych is to buy products that reflect the aspirational lifestyle they want to have and will make the budget work.

Consumer models such as Louis Vuitton, Starbucks, KFC have seen success in China. In fact KFC is the largest restaurant chain in China with over 5,000 stores.

Tech models like Apple and Tesla also tap into the aspirations of Chinese consumers. Apple, while trying to fend off every form of competition, is still well positioned and beloved by Chinese consumers for its premium brand. It’s early lead may slowly get eroded by every other handset maker, but its brand and image remain an alluring moat for the company.

Airbnb, which started life as a simple couch-surfing service, has created a lifestyle brand. Now it’s opening a separate China unit. Airbnb will need to continue to build the vision of bringing a curated experience and unique taste to consumers in China. Offering the prestige of international travel experience is also a differentiator that’s hard to copy.

Coursera is growing in China. In fact, it’s the number 2 market for the company behind the U.S. The reason Coursera is so appealing to Chinese consumers is because it offers people the opportunity to take courses created by Ivy League institutions, something both highly valuable and worth striving for. (Disclosure: GSV owns stock in Coursera)

Both companies still have a lot of work to before they can celebrate. Airbnb is facing multiple stiff local competitors and Coursera has only reach 1 million (of the nearly 700 million) Chinese Internet users.

But an ASPIRATIONAL BRAND like Airbnb or Coursera can succeed where a more utility service like Uber failed.

Easier said then done. Jia you!

Jia you literally translates into “add oil”, the most common refrain of encouragement in Chinese.