Evaluating Mobile Apps For Investment
Nov 16, 2017
The original post can be found on my weekly Inc.com column, Uncensored.
There's a lot of data to consider when evaluating an app for investment, make sure you're looking at it in the right way.
The app economy is a market worth more around two trillion dollars. That's trillion with a 't.' Knowing that, it's wise for investors and those participating in the economy to understand how to evaluate a potential investment. Keep in mind that this number is only expected to grow over the next five years. While you could be looking to purchase a specific app or entire app portfolio, we're going to focus on investing as a venture capitalist in a single app.
Before founding Apptopia, I analyzed prospects as part of my work for a VC firm. We needed to understand the long term growth prospects of an app or app portfolio. To do this, we would look at the app's historical data and compare it to historical data of already successful apps. If the app happened to be in the same category as our current prospect, even better.
You want to understand the current trend and determine if you think this will continue or change. If it's going to change, how exactly? Let's dive into different metrics and how to view them, as well as how not to be deceived by initially good looking data. Even though there's a lot of money in this space, it's top heavy and investment decisions cannot be made lightly.
The almighty download
The most important thing is growth and all growth starts with the almighty download. You want downloads to be accelerating over time. If an app is receiving 500 downloads per day, its user base is most likely growing, but it's flat growth. If the app in question received 500 downloads today, we want it to have more than 500 tomorrow and so on. You need to see long term growth prospects.
Does the app have staying power? Even if you and your team are seeing serious growth, you need to do your due diligence to make sure it's not just a flash in the pan. Be wary of paid download farms. To help weed this out, identify where the downloads are coming from. If the app is being marketed in the US but has heavy downloads in India, this could (but not necessarily) mean fake downloads.
Or maybe the downloads are coming from Vietnam. While these might be real downloads, the Vietnamese market doesn't monetize as well as others. This is all part of trying to learn about the quality of user and quality of growth. Another tip off would be the reviews and ratings. While you should read the reviews and look at the ratings to make sure people are enjoying the app, if the amount of reviews does not correlate with the amount of downloads, there could be something fishy going on
Do you understand the mechanics of the app store? You might see a large spike in downloads but this could easily be the result of a burst campaign. A bust campaign is when a lot of money is spent on user acquisition ads in a short period of time. Make sure the downloads chart doesn't look like a bunch of peaks and valleys. This means growth will only come from heavy advertising and not from word of mouth.
Quality of users
Now onto the app's users post-download. How many are sticking around? We want to know seven day, 14 day, 30 day, and 90 day user retention. This helps us understand if the app is 'sticky' as they say. What is the relationship between daily active users and monthly active users. If an app has 10,000 monthly active users (MAU) and 3,000 daily active users (DAU), this means that there is a high level of engagement. Most apps with 10k MAU will actually have less than 1k DAU.
Some data providers will even have a user graph where you can see if users of the prospective app are also likely to be users of other top grossing apps. This gives you some insight into the users and if they're comfortable with spending money on mobile.
Broaden your data points
Keep in mind that you do not want to evaluate an app in a vacuum. Is the industry this app is in growing, declining or stagnating? How does its performance data compare to the early days of successful apps? How does it compare directly with its competitors? Look at the same performance data and trends for these apps as well so you have benchmarks.
There's a lot more we could talk about such as how the apps plans to monetize, what its return on advertising is, and how the app performs in search results. Please do not hesitate to reach out if you have any questions about evaluating an app or app portfolio!