3.2.4 Noise and Signals

It always seems easy to spot the big winners after they aresuccessful. It’s much harder in the early stages when there is lessinformation. And, there are many false signals that lead managersastray.

DrawQuest

DrawQuest developed an app that created daily drawing challengesfor users. The app was immediately popular. In 2013, its first yearof operations, 1.4 million users downloaded the app and 400,000used it at least once a month. DrawQuest’s storage vaults heldeight million drawings, which it promised to maintain forever forits user-artists.

Do you think that user downloads or per-month users were goodmetrics for DrawQuest?

DrawQuest intended to make money by offering premium drawingtools and other services. Unfortunately, few users opted to pay andthe company went out of business in 2014. Having lots of users andrave reviews is not the same as creating and capturing value. Abetter metric might have been the number or percentage of users whopurchased their premium packages.

Twitter

More recently, there was some concern about companies likeTwitter, which had large numbers of registered users but decliningnumbers of active users. In network businesses, users andadvertisers value engaged and active participants. As one highlysuccessful investor, Josh Elman, once noted: “The only metric thatmatters is customer engagement – are people using yourproduct?”

This advice seems to contradict the DrawQuest story. What do youthink is the difference between Twitter and DrawQuest that makesactive users such a good metric for Twitter, but a poor metric forDrawQuest?