Ask A VC: Spark’s Nabeel Hyatt On Hyper Growth And Whether Facebook Is Fueling Future Rivals

Ask a VC is back this month (finally!) after a long hiatus. This week we have a freshly-minted VC, Nabeel Hyatt, of Spark Capital. Hyatt just joined Spark after 15 years of starting and building companies. His most recent company was social gaming outfit Conduit, which became Zynga Boston after it was acquired.

We have a couple of questions from readers — one from Nicky, who asks whether the VC model is “broken”, and another from a reader Alex, who asks about how the landscape for user acquisition is changing.

User acquisition is Hyatt’s home turf. As a general manager at Zynga, which is the most data-driven company on the Facebook platform, he had to know the arc and decline of social games like the back of his hand. This is super-useful in light of the explosive growth that apps like SocialCam and Viddy are seeing on Facebook and iOS.

What’s happening right now is that Facebook is finally becoming a potent force in mobile app distribution, as Hyatt explains in the video. A year ago, if I talked to top free or grossing developers, hardly any of them said Facebook was an important channel for acquiring users. They were too addicted to paid channels like Free App A Day, offer walls or even download bots. Several of these channels are now banned by Apple, which is making more room for apps that are genuinely engaging or are getting users virally.

Secondly, Facebook is realizing that if it wants to stay relevant in a mobile era, it has to step up its ability to push traffic to mobile apps, Hyatt says. A year ago, they were bent on bypassing the native app route and pushing the ecosystem toward building with HTML5 instead. But over the last few months, they’ve stepped away from that rhetoric and are now driving traffic to both native and HTML5-based apps.

With the new mobile platform, Facebook is now able to single-handedly drive apps to the top of the free charts on iOS — something it didn’t do a year ago. That pushed apps like Viddy and Socialcam to the top of the charts over the past month. Now the question is what does this mean? How should these companies be valued? Are investors being sophisticated enough about how to value them?

Hyatt says working at Zynga has given him many insights about what to look for. Namely, downloads and even daily active users aren’t sufficient enough metrics for judging apps.

You have to ask for other numbers. For example, he’ll look at one-day retention: how many users come back the second day? And he’ll look at seven-day retention: how many users come back seven days later? He also looks at DAU/MAU, which is the ratio of daily active users to monthly active users. It’s a measure of stickiness: out of all the users that touch an app every month, how many come back every day?

If you look at Viddy and Socialcam, this DAU/MAU metric is looking troubling on both of them, according to AppData. (Though, keep in mind, there have been some reporting errors over the past week.) He said that very few games can thrive if they fall below 12 percent on this metric. Even though Farmville is about three years old, it’s still hovering at around 19 percent. Viddy has been below 10 percent for more than a week and SocialCam just dipped below that key level. This is a negative sign.

That said, when an app gets a slug of growth like this, the peak number of users is not actually that important. It’s the number of users that it keeps engaged for the following several months.