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Quora's Adam D'Angelo: The Single Metric That Predicts Your Startup's Valuation

By Adam DAngelo · Investing · 1 min read

One metric correlates more with startup valuation than revenue or growth: whether your users spend MORE over time.

Key Points

Account expansion (users spending more over time) has a 0.54 correlation with valuation — stronger than revenue or growth
Increasing revenue per user over time separates great companies from mediocre ones
There are basically two classes of companies: those with expanding revenue per user and those without
Measure your retention. Everything else follows from there.

By far the strongest correlation to valuation is account expansion — people spending more over time.

The Study

Venture capitalist Tom Tunguz studied what predicts startup valuations.

Revenue growth: 0.8 correlation. Total revenue: slightly higher.

But the strongest predictor by far: account expansion. Users spending more over time. 0.54 correlation.

Two Classes of Companies

The data shows there are basically two classes of companies.

Class one: revenue per user increases over time. These get premium valuations.

Class two: revenue per user stays flat or declines. These get everything else.

There are two classes. Those with expanding revenue per user and those without.

Measure Retention

D'Angelo says the one thing every startup should do: measure retention.

It leads to everything. Better products. Better growth. Better valuations.

If your users are spending more over time, you are in class one. If not, fix that before anything else.