The Hierarchy of Engagement

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Building an enduring, multi-billion dollar consumer technology company is hard. As an investor, knowing which startups have the potential to be massive and long-lasting is also hard. From both perspectives, identifying companies with this potential is a combination of “art” and “science” — the art is understanding how products work, and the science is knowing how to measure it. At the earliest stages of a company, it comes down to understanding how a product is built to maximize and leverage user engagement.

In this presentation, Sarah Tavel shares her "Hierarchy of Engagement" framework she uses to evaluate non-transactional consumer companies she is looking to invest in.

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The Hierarchy of Engagement

  1. Engagement The Fuel Powering Enduring, Billion Dollar Businesses Sarah Tavel greylockpartners.
  2. At Greylock, we obsess over building enduring, multi-billion dollar businesses.
  3. There are only five I publicly traded tech I companies created since 2000 that are now worth more than $1OB. $ I N Greylock backed four of them. greylockpartners.
  4. _ Greylock leads Facebook’s ‘ T 2006 Series B when the company had 7M+ users 2004 2016 Facebook now Mark Zuckerberg launches has over 1.5B Facebook at Harvard users worldwide
  5. Linkedfl 2002 Reid Hoffman and l team found Linkedln The world’s largest ‘ 2015 T professional network, 2004 reaches 400M+ members Greylock leads the Series B, the network had 1.2M members
  6. akbnb 2010 Greylock invests in the Series A 2008 Airbnb is bigger than any hotel 2016 Chain in the world, with 2M+ Airbedandbreakfastcom listings that have served 60M+ is launched guests-
  7. A l: OLE t Me Joined Bessemer and invested in 2006 Convertro, Cornerstone OnDemand, MindBody, Yodle, and others l 2011 Co-led Series A in Pinterest when it was 5 employees, and in 2012, joined as one of their first PMs Led product for Discovery team as Pinterest scaled through period of hyper-growth Joined Greylock 7015 investment ' team. Pinterest reaches 100M+ MAU.
  8. The Big Question How do you know if a startup has the potential to become an enduring, $1B+ company?
  9. it’s a cor’l, t:iifatior, of art and scietce. :0 o ‘i’ 2. Art Science Understanding how Knowing how to products work measure it greylockpartners.
  10. The stage of the company matters. Early CO3Tapgaeny Mature :0 0000 O The earlier the company is, the more art is involved when evaluating it. As the company matures, it becomes more of a science. greylockpartners.
  11. At the core, it comes down to understanding engageittlent. greylockpartners.
  12. Tavel’s Hierarchy of Engagement The Goal B $]; B+ An enduring, multi-billion dollar company. usiness Level 3 Self" . As users engage, they create virtuous loops in Perpetuatmg the product. Level 2 Product should get better the more it’s used. Users have more to lose by leaving the product. Level 1 Focus on growing users completing the core action. Retaining users Growing engaged users greylockpartners.
  13. As you’ll see, there are some similarities to Nir Eya| ’s Hook model. 7 X J ’4'vssme“‘ 4criofi' (‘VJGGE/ RA At; wARo greylockpartners.
  14. Level 1: Growing Engaged Users Level 1 Growing engaged users Focus on growing users completing the core action. greylockpartners.
  15. Trope in Silicon Valley has focused on growth and “growth hacking” growth hacking Sr i'ff"i'fl"l Interest over time Source: Google Trends
  16. A lot of companies have growth early on. . , , , , , , , , , , , , _ . i i . i i s 7 , i . i i s - o i z . i 15 iPhone Downloads Source: AppAnnie
  17. But growth comes in c. snapchat ~ Yik Yak iPhone Downloads Source: AppAnnie '. f.. € Iii iiiiii H I I 9 V3 i'l'L' 'I'O E‘ WIS . JlL- . musica| .ly greylockpartners.
  18. What matters is not growth of users. |t’s growth of users completing the core action. greylockpartners.
  19. Core Actions (Pl'IIteI°e. sQ Pinning Q snapchat Snapping twilzher Tweeting YOU Uploading a video greylockpartners.
  20. Will the core action scale to enough users? Level of of motivation and ability determines if action will occur. Mlllllillllll TRIGGER FAILS Fogg Behavior Model greylockpartners.
  21. It can be really hard to tell. Facebook Open Graph Distribution - Examples of Onboarding 17MM New Users in 7 Days‘! Viddy Monthly Active Users (MAU) and Daily Active Users (DAU) on Facebook Platform. 3/31/12 - {M29112 40 u: o 4fi5“"F9a“c*'e“'3°3'k°57?i""s Viddy had incredible Viddy Monthly 8. Daily Active Users D :20 NewsFeed user growth, but 5.. . didn’t grow users completing core 3x31 497 4'14 421 we sws 512 519 5'26 KPCB Source: AppData via KPCB greylockpartners.
  22. Signs of it vvorltirzigs In 2011, Pinterest was growing quickly. A few things , stood out: ~ Product with clear value exchange Dally User Vlslts “ Compounding growth ~ >50% of weekly users would pin greylockpartners.
  23. Level 2: Retaining Users Level 2 Product should get better the more it’s used. Users have more to lose by leaving the product. Retaining users greylockpartners.
  24. So, we’ve got engaged users. That’s great. Now the question is whether the users will stick. greylockpartners.
  25. Retention Matters 45 40 35 30 25 20 15 10 5 0 Monthly Active Users (M) 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930313233343536 —campany A —camuany B Company A: 5M new users per month, 80% monthly retention Company B: 2.5M new users per month, 95% monthly retention greylockpartners.
  26. After 6 Months: 45 40 35 30 25 20 15 10 S 0 Monthly Active Users (M) / 1 2 3 4 5 6 7 8 9 10111213141516171819202122232-1252627282930313233343536 —campany A —campany B Company A: 5M new users per month, 80% monthly retention Company B: 2.5M new users per month, 95% monthly retention greylockpartners.
  27. After 3 Years: Monthly Active Users (M) as Company A: ‘° 5M new users per month, 80% monthly retention 35 SD 25 —campany A 2° Company B: " 2.5M new users per 5 month, 95% monthly 0 retention 1 2 3 4 5 6 7 8 9 10111213141516171819202lZ2Z324252627282930313233343536 10 Company A = 25M users Company B = 42M users greylockpartners.
  28. How can you predict if engaged users will stick? Investors look for products that have accruing benefits as a user engages, and mounting losses if the user leaves the product.
  29. Accruing Benefits The more you use the product, the better it gets. This is largely because a consumer adds data to the product, either explicitly or implicitly, and then the company uses this data to improve the experience for the user. greylockpartners.
  30. Mounting Loss The longer you stay with the product, the more you have to lose by leaving. It becomes a product you depend on, part of your identity, or it becomes a product on which you've accrued value of some sort greylockpartners.
  31. G EVE RNOTE’ - Evernote’s freemium model is like a drug dealer offering a little “taste” to hook users. - The more notes you add to Evernote, the more value you get and it becomes harder to leave. greylockpartners.
  32. . i I V ‘ ‘ 4 A -. ‘ -, 1 . A 1, 9 9 ii it P ~H~. ._, _. I I , —~- 7 - The more you pin, the more you become reliant on Pinterest as a store for your bookmarks, and it becomes an extension of your identity. - As you pin and follow boards/ , " users, the discovery experience l l becomes more personalized. greylockpartners.
  33. 1. Uri the other l1anc! .. - A lot of anonymity apps look good for Level 1 but fail for Level 2. - Twitter has anonymity if you create a profile under a fake name. But because identity is persistent, the app has: Accruing benefit: new follows/ followers Mounting loss: your investment in your identity such as your fol/ ow graph 33 Secret - I Yik ‘. c-k greylockpartners.
  34. To Summarize Products that have . . Give more value to Which makes it accrumg benefits users over time more likel ’ . y they II and mounting Stick loss. .. greylockpartners.
  35. Level 3: Self-Perpetuating Level 3 Self‘ . As users engage, they create virtuous loops in perpetuatmg the product.
  36. Okay, so we now have a growing base of engaged users, and a sticky product. greylockpartners.
  37. Now the question is whether the engagement of existing users creates virtuous loops in the product. greylockpartners.
  38. The strongest virtuous loop is a network effect. [A More content More users pin Ky‘ J Better discovery experience greylockpartners.
  39. But there are many other virtuous loops. For example: Sends pin User _ Notifies / RU . to friend discovers pin existing user 59'" repms Acquires user Re-engages user Growth Re-engagement greylockpartners.
  40. Virtuous loops are really hard to create — most products don’t have them (though many try). greylockpartners.
  41. G EVE RNOTE” - As strong as Evernote is on Level 1 and Level 2, it falls short on Level 3. - Evernote’s product is much more about user value than creating virtuous loops. greylockpartners.
  42. ‘ rm - Tinder has some virtuous loops. E. g, a match sends a notification to a user, which re-engages them. - But the most important one — a successful date, is an off-ramp, not an engagement accelerator. More engaged USGI’ /9% Match with someone Successful date greylockpartners.
  43. Virtuous loops propel a company forward. greylockpartners.
  44. IQ Medium Self- Level 3 perpetuating Medium continues to move up the pyramid. Retaining users Growing engaged users greylockpartners.
  45. The Most Important Thing To Measure
  46. We’ve talked about Over time, investors three things: want to see: 1. Growing Engaged Users —> Growth, New users continuing to be engaged 2. Retaining Users —> Retention 3- VWEUOUS LOOPS —' Se/ f-perpetuating greylockpartners.
  47. The Ultimate Metric: Cohort performance Number of weekly The dearest Way users completing the to understand a core action company’s engagement is to iook at co|1ort5_ Percentage of weekly active users completing the action greylockpartners.
  48. Cohorts show: Growth —> Size of each cohort Engagement —> Ratio of users performing the core action Retention —* Cohortperformance over time greylockpartners.
  49. There are different ways to visualize cohorts: 232th: ; a_ ii 2 Triangle Heat Charts Line graphs Maps greylockpartners.
  50. If you track cohorts, you will be in good shape to demonstrate your engagement hierarchy to investors. greylockpartners.
  51. Tavel’s Hierarchy of Engagement The Goal B $]; B+ An enduring, multi-billion dollar company. uslness Level 3 self" . As users engage, they create virtuous loops in Perpetuatmg the product. Level 2 Product should get better the more it’s used. Users have more to lose by leaving the product. Level 1 Focus on growing users completing the core action. Retaining users Growing engaged users greylockpartners.
  52. Engagement is the fuel powering most of the enduring, $1B+ non- transactional consumer companies. greylockpartners.
  53. Thank you. Follow Greylock: Contact me: (O) www. grey| ock. com Sarah Tavel IQ medium. com/ @GreylockVC E stavel re lock. com y @GreylockVC y @sarahtavel greylockpartners.

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