Quora founder Adam D’Angelo explains cohort retention and key startup metrics

As a startup, you really need to focus. So the core concept I would try to focus on is users that are getting value today. There's different ways to, different indicators of this. You might say you want to focus on active users. People are going to be active if they're getting value. You might want to focus on revenue. That's a sign that people are getting value. In the case of a marketplace where you have things like buyers and sellers, that's usually a case where it makes sense to measure transactions. Anytime you have these different groups, if you say, okay, we're going to measure buyers and then we're going to measure sellers, then there's actually a lot of stuff you can do that will make things better for the buyers and worse for the sellers. And some of those things are good. And so measuring transactions is a way to unify them and align your work on things that are going to benefit both sides. So if you have a two sided market or anything like that, then you want to measure transactions or transaction value. So things like eBay, they'll measure total value of all the goods that are sold on ebay. So to start, this is a quick thing and you go a long way just by measuring this. If you're not measuring anything, you're susceptible to all these cognitive biases that Stuart talked about. There's all kinds of problems. You're just not going to know what's going on. So next most important thing to think about is retention. First, I want to make sure everyone understands what a cohort is. So a cohort is all the users who first used your product in a certain time window. So for a startup, you might make the time window a week. So you can say there's a cohort of all the users who first used your product in the first week that it launched and you can track those users over time. There's a cohort of all the users that first use the product a week later. And you measure all these cohorts and you can track them. And this tells you what's happening to users over time. And this is an important, it's a really important way to balance. You're just measuring the total value that all the users are getting. This is a graph of total of cohort usage for a sort of relatively old Internet product. The blue line is users who joined this product in 2004. And that's. And so you can see, and so this, the Y axis here is what percent of them are still using it. And the X axis is time. So over time, if you just Follow the blue line. You can see basically every month there's fewer and fewer people that joined the product in 2004 that are still using it. And this is basically the same story for all these different cohort lines. So what do you think is going to happen to this product in 10? This is about, let's say this is about 6 years. The scale of this graph. What do you think is going to happen in six years later? Any guesses? It's going to be opposite. It's going to turn around. Yeah. Yeah, I think something would need. Something different would have to happen to change that. No one will be using it. Yeah, it's hard to know. It's hard to know what would happen. I think probably everyone's going to stop using the product. I think some companies will manage to turn these around, but it's very hard to because you get fewer and fewer. You get less and less usage from your old users. It's also usually the old users are what cause you to get new users. And so if you have this problem, it's pretty bad. This is a pretty scary place to be. Even if you can have a ton of users, you can have total usage growing. But if usage from every cohort is declining, then you're going to run into big problems. There's this idea called the Ring of Fire, which is a way to visualize this. Unless there's some kind of lower bound, you're going to burn out all your users. And so here's the analogy. Imagine there's a big field of, let's say, of dead grass, and someone lights a match. In the middle you're going to get a fire and the fire is going to grow and grow. But then in the middle of the fire, you're going to start to run out of fuel and it's going to burn out. And so you get this ring, and the ring is going to get bigger and bigger, and in the center you're going to burn out more and more of the fuel. And so the fire will get bigger and bigger, but eventually you're going to run out of the whole field and the fire is going to stop. And so you don't want this to happen. Here's an animation I made to try to illustrate this. So here's what you notice. So it looks great at first. There's more fire every frame than the previous frame. But in the end there's nothing. Right? So you don't want this to happen. And it's really important to internalize this concept because if you don't you can fool yourself, you can do a lot of things that are going to cause you to get more and more usage over time, but at the expense of the existing users. And if you don't do this, eventually your company is going to die. I think some recent examples are, I think Groupon was a good example of this. They got huge, tons of usage, all these merchants, but it wasn't a good experience for the merchants in the long term. And so they all stopped using it. And then I think more recently, Pokemon Go is another example, got really big, lots of users, but it just faded away. And you don't want to build a fad, you want to build something that's going to last. And so you need to make sure that you're measuring the usage from the existing users. It's not just that you're getting more users. So you need to have some, you need to make sure the existing users keep using the product. Actually, if this can go in reverse, you're in an extremely powerful position. There's a small number of products where the cohort usage actually will increase over time. One example is WhatsApp. This is, I think most messaging apps, as you get more of your friends on the app, there's more people to send messages to and so they're able to get this increase in cohort usage over time. Uber on the rider side, this is another good example. As people start get used to Uber, they use it more. As the pickup times come down, they use it more. As prices come down, they use it more. And so that's really. Uber's in a really strong position there. That's not true actually on the driver side. So Uber has problems on the driver side because they don't have this property there. And then Facebook, you can see in the numbers they report publicly, they keep on their total usage is growing faster than their number of users. So you know that they must have this increasing usage per user over time. So if you can get to this is very hard to get to this. But if you can get to this point, then you're in a really strong position. And one way to actually think about and idea is whether as the product gets bigger, as you get more users, as you have as you develop the market, is it the kind of product where people would use it more over time? I think that's another kind of lens you can apply as you're considering ideas. Just one more data point. This venture capitalist named Tom Tungas did a study on what predicts valuations that startups raise money at and it's just a simple correlation study. And these are some different factors in how much they correlate to the valuation that a startup is going to get. First is growth of revenue, and that's 0.18 correlation. Second is just how much revenue they have in total. That actually correlates a little bit more strongly than growth. But by far the strongest correlation is account expansion, which means people spending more over time. It's the same thing as retention increasing over time. And this correlation is extremely strong for a complex number like what the valuation of a company is going to be. The fact that you can explain 0.54 out of 1 of the variation in that number by this single variable about whether the company is increasing revenue per user over time, that's a sign that it's almost like this is like there's just two classes of companies. One class where there's increasing revenue over time, and another class that gets totally different valuations where this is not happening. So the main thing I just want you to remember from today is you should measure your retention. That's going to lead you to do a lot of things that will help you in all kinds of ways. It's going to help you grow, it's going to help you retain your users, it's going to help you build a product that users really love.