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Understanding Social Platforms by Version One Ventures

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An abridged / deck version of our Social Platforms handbook: http://versionone.vc/social-handbook/

Understanding Social Platforms by Version One Ventures

  1. 1. Understanding Social Platforms February 2017
  2. 2. VC Insights 1. Overview of Social Platforms 2. Messaging 3. Private Social Networks 4. Public Social Networks 5. Enterprise Social Networks 6. Communities 7. Social Platform Metrics 8. Exits and Valuations 9. Opportunities 10.Final Remarks Roadmap
  3. 3. What’s a social platform? At Version One, we consider something to be a social platform if the interactions on the site are driven or defined by an underlying relationship between the participants. Messaging Private social network Public social network Enterprise social platform Community
  4. 4. Categorizing social platforms nature of content public / private broadcast model one-to-one / one-to-many connections asymmetric (follow/subscribe) / symmetric (opt-in both sides) nature of relationship personal / shared interest / worldwide connection persistence of content permanent / ephemeral identity real name / user name / anonymous
  5. 5. Success factor 1: Depth of relationships The depth of the underlying relationships determines how sticky an app will be. Think not just about the size of the user base, but also the value that particular users bring to the platform. What network effects are at play?
  6. 6. Success factor 2: Daily use case Engagement is the most important metric for social platforms, and so a daily use case is imperative. What keeps users coming back? Snapchat: people communicate with friends every day. Instagram: people take photos every day. Pinterest: People surf the web and want to bookmark things every day.
  7. 7. Success factor 3: Native monetization opportunity In top platforms like Facebook, Instagram, and Twitter, native ads that match the visual design and user experience of the site are growing in popularity for two reasons: 1. People don’t want to be disturbed in their social activity. 2. Ads can be targeted or personalized to drive higher conversion, and therefore command higher ad rates.
  8. 8. Success factor 4: Personalization of content The overwhelming amount of information users receive every day means that social platforms must deliver the most engaging and relevant content. Facebook uses machine learning to track users’ actions to serve posts and content that they’re more likely to engage with. Ex. people who click on photos will see more photos on their newsfeed.
  9. 9. VC Insights 1. Overview of Social Platforms 2. Messaging 3. Private Social Networks 4. Public Social Networks 5. Enterprise Social Networks 6. Communities 7. Social Platform Metrics 8. Exits and Valuations 9. Opportunities 10.Final Remarks Roadmap
  10. 10. Messaging platforms are becoming the primary way we communicate. That’s because the ubiquity of mobile makes messaging so easy. The market for this type of social platform remains fragmented. It’s notoriously difficult for apps to build effective moats and business models. Messaging
  11. 11. 2.5 billion people are using messaging apps today Source Business Insider
  12. 12. Three subcategories Plain SMS/text messaging Basic messaging with stickers, group chat, and other extras New behaviors Novel kinds of interactions and use cases Platform approaches Development environments in their own right, rather than just messaging services
  13. 13. Business models Subscriptions After WhatsApp abandoned this model in 2016, subscription fees seem unviable. Ads In 2015, Snapchat began running ads. This is still a young market and returns for advertisers remain uncertain. In-app purchases Purchases such as stickers have proven to be lucrative for Japan-based Line. Distribution platform WeChat users in China can book tickets, order dinner, schedule appointments, etc.
  14. 14. Distribution platform: WeChat Source 2015 Internet Trends Report, Mary Meeker
  15. 15. No winner takes all…yet We attribute market fragmentation to two factors: 1. Low network effects. While messaging apps have high virality, the size of the user base itself doesn’t create a moat. 2. Low switching costs. The ability to switch between apps on mobile devices makes cross- platform use easy.
  16. 16. Low switching costs: other factors • Largely Driven by teens. Young users can be less loyal, and adopt new services quicker. • Smaller social graph. Leaving Facebook means leaving potentially hundreds of friends. Leaving a messaging app may mean leaving 10–20 people you chat with, who are accessible on other apps anyway. • Messaging lives purely in the present. Your history on a messaging app is far less important than on social networking sites like Facebook, Instagram, or Twitter.
  17. 17. VC Insights 1. Overview of Social Platforms 2. Messaging 3. Private Social Networks 4. Public Social Networks 5. Enterprise Social Networks 6. Communities 7. Social Platform Metrics 8. Exits and Valuations 9. Opportunities 10.Final Remarks Roadmap
  18. 18. These refer to apps that have standardized two-way friending, where the connection must be accepted by both parties. Before the dominance of Facebook and LinkedIn, this was once a fragmented market. Former contenders included: Friendster, MySpace, Bebo, and Orkut. PrivateSocialNetworks
  19. 19. How did Facebook win? Daily use Relevance of content We care what our friends, family, and other connections are doing, reading, and sharing. Depth of relationships Two-way friending ensures users most likely have an existing relationship and are interested in the connection.
  20. 20. Virality and network effects Successful private social networks exhibit both virality and network effects. Facebook spent little on marketing in its early days. Its users did the acquisitions for it. As Facebook grew beyond its college setting, members’ social graphs expanded to include childhood friends, work friends, family members, sports teammates, etc.
  21. 21. Business models Ads The ability for these networks to segment users by interests, age, geography, and buying habits is valuable to advertisers. Distribution platform Facebook delivered 41.4% of all referral traffic to publishers in Jan 2016, beating out Google and every other traffic source. Subscription revenue While its basic membership is free, LinkedIn sells premium subscriptions to businesses looking for talent solutions.
  22. 22. VC Insights 1. Overview of Social Platforms 2. Messaging 3. Private Social Networks 4. Public Social Networks 5. Enterprise Social Networks 6. Communities 7. Social Platform Metrics 8. Exits and Valuations 9. Opportunities 10.Final Remarks Roadmap
  23. 23. These refer to apps that have an asymmetrical follow model, where you can follow someone else without them following you back. Examples: Twitter, Instagram, Figure 1*, Vine, YouTube, Twitch, and Wattpad* PublicSocialNetworks *Version One portfolio companies
  24. 24. Network effects and the 1% rule 1% of users create the content 9% engage with that content 90% just consume the content Not every new user brings the same value to the site (i.e. celebrities may draw others to the platform with their influence and popularity). Successful public social network companies offer an experience that makes it as easy and rewarding as possible to get involved.
  25. 25. Public social networks as new media Twitter’s live stream and Snapchat’s Live Stories are early examples of how people will watch and interact with live events in the near future. We expect to see social platforms move deeper into premium-grade content streaming. What makes this trend compelling is that social platforms know much more about their users than traditional media and broadcast companies ever have.
  26. 26. Find a high value niche use case. If you’re building a public (peer-to-peer) network, you’ll need to find a use case that has a high enough value to drive usage by early adopters. People today know of Waze as a traffic app. But Waze’s original use case was helping people avoid speeding tickets by sharing speed trap/radar detectors.
  27. 27. Business models Native ads These work best in niche networks where advertisers know the targeted audience. Pre-roll ads Watching just 3 secs of pre-roll ads can improve ad recall and brand awareness.* Tipping/ Micro-donations This can become an important revenue stream where there’s a strong connection between content creator and consumer. Source *Nielsen, published by Local Solutions
  28. 28. VC Insights 1. Overview of Social Platforms 2. Messaging 3. Private Social Networks 4. Public Social Networks 5. Enterprise Social Networks 6. Communities 7. Social Platform Metrics 8. Exits and Valuations 9. Opportunities 10.Final Remarks Roadmap
  29. 29. These refer to social software used in enterprise contexts. The core principle is that a more connected company is a more productive and effective company. Examples: Slack, HipChat, Yammer, Jive, TigerText, GitHub, Facebook at Work EnterpriseSocialNetworking
  30. 30. A tough nut to crack Source Harvard Business Review
  31. 31. Consumerization of enterprise technology Consumer smartphones and apps have changed our expectations for what software can be. Lacklustre enterprises products have pushed employees to bring personal devices and apps to work, gradually entrenching into day- to-day workflow. To reach scale enterprise apps need to attain the blessing of traditional gatekeepers (e.g. IT) and address concerns like security, data ownership and portability, and support.
  32. 32. Network effects in enterprise platforms User familiarity contributes to a platform’s staying power. If your business partners and vendors use Solution A, you’ll need a very compelling reason to use Solution B.
  33. 33. Rise of Slack Twenty months after its February 2014 launch, Slack had more than 1.7 million users. A truly bottom-up phenomenon, its growth was almost entirely fuelled by referrals. The company is evolving from tool to platform, having launched an App Directory and working with developers to make product integrations part of their core product.
  34. 34. Business models Fee per user, per month More appropriate for products that follow the top-down sales approach, this model is often adopted by traditional SaaS tools. Freemium This model makes it as easy as possible for users to sign up and get started, then convinces them to upgrade. It’s been an effective choice for Slack.
  35. 35. VC Insights 1. Overview of Social Platforms 2. Messaging 3. Private Social Networks 4. Public Social Networks 5. Enterprise Social Networks 6. Communities 7. Social Platform Metrics 8. Exits and Valuations 9. Opportunities 10.Final Remarks Roadmap
  36. 36. Online communities are held together by people who hold common interests and who don’t typically have pre- existing relationships offline. They are also characteristically one-to-many relationships. Examples: Reddit (news), Last.fm (music), Goodreads (books), Flixter (movies), Overtime (sports) Communities
  37. 37. Why do people join? • They share similar interests with the community. • They want to contribute to the community. • They benefit from the community — for example, by gaining a sense of belonging or finding content of interest.
  38. 38. Highly verticalized Online communities provide outlets for specific aspects of your life. There is typically little cross- pollination between communities.
  39. 39. People are attracted to communities for the content. Relevance and depth take precedence. Utilitarian
  40. 40. 90-9-1 Rule Applies As with public social networks, not all community members interact in the same way or create the same value. 1% contribute a lot (initiate topics, share content, etc.) 9% contribute a little (interact with posted content) 90% are lurkers
  41. 41. The chicken or the egg? How do you convince people to visit, join, create, and invest their time when your community is new and there’s not a lot happening? You can seed initial content. Reddit posted links through profiles it created in the early days to give the appearance of popularity.
  42. 42. It’s risky business. When Reddit fired Victoria Taylor, who coordinated Ask Me Anything (AMA), more than a hundred subreddits shut down in protest. A community can be an integral part of members’ lives and identities. Changes are rarely taken lightly. A good moderation policy and culture of civility must be established early on.
  43. 43. Business models Ads Advertising is the core revenue source for online communities since they serve up a targeted audience for advertisers. Scaling through ads, however, is hard. Distribution platform Online communities can be powerful platforms for content distribution and commerce. User content can offer inspiration, while the community itself offers social validation and recommendations.
  44. 44. VC Insights 1. Overview of Social Platforms 2. Messaging 3. Private Social Networks 4. Public Social Networks 5. Enterprise Social Networks 6. Communities 7. Social Platform Metrics 8. Exits and Valuations 9. Opportunities 10.Final Remarks Roadmap
  45. 45. We created a KPI dashboard for social platforms to help you evaluate how the business is performing. You can access the social platform KPI template via the Google Doc here. The dashboard is divided into three main areas: • High-level metrics • Measuring engagement by content • Measuring engagement by relationships SocialPlatformMetrics
  46. 46. KPI dashboard Source Google spreadsheet, Version One KPI dashboard
  47. 47. High-level metrics Daily active users (DAU) The number of unique users who engage with the product in the past 24 hours. Monthly active users (MAU) The number of unique users who have engaged with the product within the previous 30 days. DAU/MAU The “stickiness” ratio that tells you what % of your monthly active users come back on a daily basis.
  48. 48. High-level metrics: DAU/MAU This metric is critical since there’s a big difference between users who are slightly active vs. those who are really active. A DAU/MAU of 50% tells you that the average user is engaged 15 out of 30 day of the month. You want this number to be above 30–40% to have a highly engaged platform.
  49. 49. High-level metrics: Total users Total Users = New Users + Returning Users • New users: Self-explanatory • Returning users: Retained users + Resurrected users • Retained users: Active users this cycle who were also active last cycle • Resurrected users: Active users this cycle who weren't active in the previous cycle From here, you can calculate % new users, % retained users, and % resurrected users relative to the total number of active users.You can also compute growth in these categories to see how effective your growth, engagement, and re-engagement campaigns are.
  50. 50. High-level metrics: Total churned users Total Churned Users = New Churned Users + Old Churned Users • New churned users: Inactive users in the current cycle who were active in the previous cycle • Old churned users: Inactive users from the previous cycle(s) who continue to be inactive in this cycle • Knowing the number of users that have churned allows you to calculate your churn rate. Churn Rate = # of users churned at the end of the time period / # of total users at the beginning of the time period.
  51. 51. High-level metrics: Cohort analysis After we understand engagement and churn, we can perform a cohort analysis, which breaks users into related groups that share common characteristics or experiences within a timespan. This example is catered to SaaS but is conceptually relevant to social platforms. Source Christoph Janz, published by Andrew Chen
  52. 52. High-level metrics: Visualize your data Another great way to understand your data is to visualize it. Jonathan Hsu wrote about how he and his team at Social + Capital perform due diligence and shared a helpful “growth accounting” graph that summarizes most of the data previously discussed. Source Jonathan Hsu on Medium
  53. 53. High-level metrics Also track: • Track customer acquisition cost (CAC), how much and what percentage is organic versus paid • Net promoter score (NPS) • Lifetime value (LTV) • Average revenue per user (ARPU)
  54. 54. Engagement by content Defining engagement on your platform With social platforms, you need to dive deeper into your users to understand not just the total volume, but also the quality of users and user content. Create a list of actions that a user can perform. We provide some examples on the next slide.
  55. 55. Engagement by content • Account created: When a user creates an account • Account verified: When a user’s account is successfully verified • Profile created: When a user creates a profile • Profile completed: When a user completes his/her profile • Connection made: When a user accepts a friend request, or when a user follows another user who follows him/her back • Group created: When a user creates a group • Membership requested: When a user asks to join a group • Membership granted / group joined: When a user successfully joins a group …and so on!
  56. 56. Engagement by content Framework of engagement Now you can create a framework of engagement, a pyramid diagram that organizes a user’s behavior. At the top, place the activity that you determine to be a sign of someone who is most engaged with your product… Source Version One engagement pyramid
  57. 57. Engagement by content Framework of engagement …Next, consider other activities that your users can perform and place them in order from what requires the most energy to what is easiest. You are identifying the highest level of user engagement and can devote resources to achieve that outcome. Source Version One engagement pyramid
  58. 58. Engagement by content Build your engagement dashboard The next step is to understand how “healthy” your engagement is. From the previous list, you can build a content engagement dashboard similar to what we did or high-level metrics. For instance, on a monthly basis, you can tally all the “positive actions.” Let’s use images as our example.
  59. 59. Engagement by content Source Google spreadsheet, Version One KPI dashboard
  60. 60. Engagement by connections Depth of relationships matter and can be tracked. We feel that stickiness is not only a function of common interests, but also the depth of relationships on the platform. This is probably one reason why anonymous social networks have not scaled in the past (e.g. Secret). The next slide gives examples of relationship metrics.
  61. 61. Engagement by connections Source Google spreadsheet, Version One KPI dashboard
  62. 62. Engagement by connections Our thesis is that social platforms are sticky due to two things: • Unique, user-generated content • Strong underlying relationships between users
  63. 63. Viral Coefficent (K) The viral coefficient tells you the number of new users that each existing user brings in. A viral coefficient of 10 means that on average, each current user brings 10 new users to your platform. K=i*c i= Average number of invites sent by each customer. c= Percent conversion of each invite (e.g.if one of five invitees convert to a new user, then c=0.2).
  64. 64. Viral Coefficent (K) For viral growth K must be greater than one. Also consider your Viral Cycle Time, which is how quickly users sign up, send out invites, and convert others. The bottom line: 1. Increase the number of invites sent out 2. Improve the conversion rate for those invites 3. Shorten the time needed for new users to use the platform, and send out their round of invites.
  65. 65. VC Insights 1. Overview of Social Platforms 2. Messaging 3. Private Social Networks 4. Public Social Networks 5. Enterprise Social Networks 6. Communities 7. Social Platform Metrics 8. Exits and Valuations 9. Opportunities 10.Final Remarks Roadmap
  66. 66. Social exits generally happen earlier than marketplaces and SaaS exits. When social networks hit it big, they can become huge IPOs. However, only LinkedIn, Facebook, and Twitter have achieved this in North America. ExitsandValuations
  67. 67. Largest social exits in history Source CB Insights
  68. 68. Mergers and acquisitions Aggressive M & A activity has led to heavy consolidation over the years. Facebook and Twitter each have made over 50 acquisitions. This is driven by the desire for synergy. If a social network buys another one, it can instantly introduce a new app to its user base and accelerate growth. This is what Facebook has done with Instagram and Twitter with Periscope.
  69. 69. Valuing social networks Valuing startups is tricky business. Mahesh Vellanki looks at equity per user in the next table (with fictitious Company X at the bottom). If the fictional company is more like LinkedIn, Facebook, or Snapchat, then it would be valued well over the billion dollar mark. But if it’s more similar to Cheetah Mobile or Weibo at the lower end, its valuation would be around a couple of hundred million dollars.
  70. 70. Equity per user Source Mahesh VC, Redpoint Ventures
  71. 71. Retention/engagement Given the broad range we see in the previous slide, we can look at a platform’s retention or engagement. To be considered highly engaging, the DAU/MAU or “stickiness ratio” needs to be above 30–40%. We can also examine user engagement by content, actions, and underlying connections covered previously.
  72. 72. Monetization potential When we think about monetization potential on social platforms, we’re looking at two things: • Purchasing power of the user group • Potential to engage users with ads
  73. 73. VC Insights 1. Overview of Social Platforms 2. Messaging 3. Private Social Networks 4. Public Social Networks 5. Enterprise Social Networks 6. Communities 7. Social Platform Metrics 8. Exits and Valuations 9. Opportunities 10.Final Remarks Roadmap
  74. 74. Strong network effects in social networks make it hard to unseat incumbents. That said, there is still opportunities for companies to: • Ride out the original wave through vertical niches • Build on the current wave of messaging as a platform/conversational UI • Jump on brand new social waves Opportunities
  75. 75. Ride out the old wave Seek new or under-represented verticals Niche sites can cater toward specific interests, locales, and professions. A vertical approach might succeed if: 1. The underlying market is big enough 2. There isn’t already a social network catering to the specific user group. Ex. our portfolio company Figure 1 found an opening in Healthcare.
  76. 76. Build on the current wave Messaging as a platform It’s hot. In China, WeChat users get movie tickets, check their bank statements, reserve hotel rooms, and schedule doctor’s appointments through the “messaging” app. But a dominant messaging app hasn’t yet emerged in North America.
  77. 77. Build on the current wave The key question is: When is messaging the optimal way of getting things done? Source Screen grab from Trim
  78. 78. Create a new wave Social AR and VR The emergence of augmented reality (AR) and virtual reality (VR) will likely change how we interact with others. Facebook and other companies are aggressively pursuing AR/VR technology. It remains to be seen which native social behaviors on AR/VR will become the next big thing.
  79. 79. Create a new wave Blockchain technology and social We expect to see big investments in developing cyptographic tokens as a new form of digital currency, with the potential to redefine online identity. Wider use of cryptotokens may open up ways of supporting user content, purchasing virtual goods, and more.
  80. 80. Create a new wave Passive social In a world of passive social, contextual social products will pop in and out of our daily lives, automatically sharing aspects of what we’re going and where we are, with implications for new products and forms of advertising.
  81. 81. VC Insights 1. Overview of Social Platforms 2. Messaging 3. Private Social Networks 4. Public Social Networks 5. Enterprise Social Networks 6. Communities 7. Social Platform Metrics 8. Exits and Valuations 9. Opportunities 10.Final Remarks Roadmap
  82. 82. At Version One, we’ve invested in social network companies that we believe leverage strong network effects. These include Abstract, Edmodo, Figure 1, Shift Messenger, and Wattpad. With each company, we’re learning more about social network success strategies. We’re excited to be active investors in this space and are looking forward to the journey ahead. FinalRemarks
  83. 83. Understanding Social Platforms February 2017 Thanksforreading! Angela Tran Kingyens @atkingyens angela@versionone.vc @bwertz boris@versionone.vc Boris Wertz

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