These are the ideas that capture our imagination and make us think about the future in a whole new way. But while these transformative visions may be the talk of the town, it's important not to lose sight of the present and the metrics that investors look for in startups.

These are the ideas that capture our imagination and make us think about the future in a whole new way. But while these transformative visions may be the talk of the town, it's important not to lose sight of the present and the metrics that investors look for in startups.

In a blog post titled "The red flags and magic numbers that investors look for in your startup's metrics," Andrew Chen dives into the key metrics that investors pay attention to when evaluating startups. He emphasizes the importance of understanding the Growth Accounting Framework and the two key loops that drive growth: the Acquisition Loop and the Engagement Loop.

The Acquisition Loop is all about how a cohort of new users leads to another set of new users. Chen provides examples of different types of Acquisition Loops, from user-generated content and SEO to paid marketing and viral growth. He highlights the importance of a startup directly asking for signups, as this indicates potential upside for growth.

To assess the quality of new users, it's crucial to analyze the source of these users. Chen encourages looking at the product's Acquisition Mix, which breaks down signups by channels and time periods. The report should reveal signals of proprietary and repeatable channels, ideally in the form of loops. Additionally, understanding the activation rate by channel provides insights into the quality of users.

While understanding the Acquisition Loop is important, it's equally crucial to consider the Engagement Loop. For network-based products like Dropbox or Slack, active user engagement is critical. On the other hand, utility-based products require engagement in one time period to set up engagement in the future. Chen emphasizes the significance of users re-engaging each other or themselves, as linear channels of re-engagement do not scale well.

The social feedback loop plays a fundamental role in user engagement. Chen highlights the importance of easy content creation, as it drives user activity and enables the social feedback loop. Building a dense and relevant network of connections is essential for a successful product.

When it comes to metrics, the cohort curves should ideally flatten at a rate higher than 20%. This indicates that each signup is activating into a sticky, active user over time. To detect artificial engagement, it's helpful to analyze the breakdown of notifications sent by the product and track volume and click-through rates over time.

While Acquisition metrics are easier to move, Engagement metrics are more challenging. Chen suggests focusing on new user activation and upselling users from one frequency segment to another as a way to drive growth. Achieving network density and enabling easy content creation are crucial for bringing users back into the network.

While it's exciting to think about transformative visions for the future, it's essential for startups to focus on the present and understand the metrics that investors look for. By analyzing the Acquisition and Engagement loops, startups can identify areas for improvement and optimize their growth strategies.

In conclusion, here are three actionable pieces of advice based on Chen's insights:

1. Analyze your Acquisition Mix: Break down signups by channels and time periods to identify proprietary and repeatable loops. Focus on optimizing these channels to drive growth.

2. Foster User Engagement: Enable easy content creation and build a relevant network of connections. Encourage users to re-engage each other or themselves, as linear channels of re-engagement do not scale well.

3. Focus on New User Activation: Upsell users from one frequency segment to another and emphasize the importance of network density. Provide users with new use cases to keep them engaged and bring them back into the network.

By implementing these strategies and paying attention to the right metrics, startups can improve their chances of attracting investment and achieving sustainable growth in the competitive startup landscape.