The Magic Numbers For Startup Health

In this new age of so-called tech “unicorns” and their eye-popping valuations, it’s important to remember that not all revenue is created equal. Indeed, recent volatility in the stock market has lots of industry watchers cautioning startups to concern themselves less with achieving unicorn status and more on building customer and employee satisfaction.

Turmoil in the markets has raised the perennial question: Are we in a tech bubble? While the verdict is still out, even those who are bullish about Silicon Valley’s growth say there will eventually be a correction that some startups will survive — and others won’t. But who will be the dying unicorns? That’s where startup health metrics come into play.

Investors are publishing detailed lists of startup metrics and marketplace KPIs about which entrepreneurs should actually care. At Udemy, along with goals for student happiness and learning outcomes, we’ve always focused on revenue and building liquidity into our marketplace for learning and teaching. But as we grew and matured, we learned quite a bit more about measuring the health of that revenue.

Here are a few of the more interesting health metrics we’ve found in our business: retention and cross-pollination on the demand side and concentration and turnover on the supply side.

Demand-Side Metrics: Retention

This means tracking whether groups of customers are returning to your company over time and completing certain activities, like making a purchase. It’s fairly obvious that having repeat customers is good for the bottom line. If you can deliver a great experience with a product that people love and need, your customers will keep coming back for more.

Most startups measure retention by looking at cohorts of customers who started using their product or service during a particular period of time and seeing if these customers return over subsequent months and years.

Shopify, for example, reports retaining 100 percent of its revenue by cohort year over year, creating what many refer to as a “birthday cake” effect (see the “Billings by Cohort” chart on page 56 of their F1 form), where new cohorts create new layers of the cake each year.

Demand-Side Metrics: Cross-Pollination

Simply put, this measures your buyers’ likelihood to purchase across multiple categories, and it’s an important metric for many retailers and marketplaces. You want to see shoppers visiting more than one department in the store. When we see students taking courses across a wide variety of topics, it tells us that our consumers want a single destination for all of their online learning.

Conversely, if most of a buyer’s purchasing is in just one product area, it might indicate that a vertical-specific offering will win the market. Kickstarter, for example, shares that almost 60 percent of total dollars pledged on the site go toward three categories: games, technology and design.

But I’d be very curious to know if individual backers actually contribute across multiple categories (suggesting they’ve fallen in love with Kickstarter as a whole) or if they are really just drawn in by a specific fundraising campaign or topic area.

Supply-Side Metrics: Concentration

This metric looks at the distribution of where the company’s revenue is originating. Most businesses experience an 80/20 dynamic, where 20 percent of customers, channels or categories drive 80 percent of the business.

Diversification removes risk, however, so it’s important to keep an eye on concentration trends and respond accordingly. In the world of retail, there’s a fine balance to strike. When the preponderance of sales comes through a small group of sellers, that gives each of them a lot of power to negotiate things like price and store display.

Supply-Side Metrics: Turnover

This data point is especially important for retailers or product marketplaces that have a competitive advantage in creating supply. If you believe a large part of the value you offer consumers comes from having the freshest assortment of products available in your marketplace, you want to see that newly listed products can quickly become best-sellers — they shouldn’t be sitting on (virtual or real) shelves collecting dust.

Seeing which new products drive the most growth is also a powerful insight for shaping business strategy. We see the importance of turnover every week when our instructors are first to market with courses on topics like iOS 9, which quickly become best-sellers.

So, while having a unicorn’s valuation and revenue may signal healthy growth ahead, it’s far from guaranteed. The recent stock market shakeup has many people starting to plan for the possibility of a more lasting downturn.

For startups, that means recognizing there are more factors that need to be weighed — and measured — to intelligently and successfully scale a business.