How to run a cohort analysis (& why VCs care)

Hi! I’m glad you’re here. You’ve made it to issue #47 of VC Demystified🪄.

My name’s Nicole - I’m a Principal at an early stage venture fund, and I know firsthand that VC can often be a black box. Breaking into the industry may feel daunting and resources can seem scarce and inaccessible. I wanted to put together a newsletter to give others the playbook I wish I had when I first started.

What does everyone have planned for this week? My parents are here in LA visiting me this week! They are helping me get settled into my new apartment. All very exciting :)

Today’s deep dive: How to track customer and dollar retention of a startup using cohort analyses and why it matters

^{My personal mission is to open as many doors as possible for other people and this newsletter is just one avenue to do that. As always, I will continue to post VC insights daily for free across my socials.}

Read time: 5 minutes

How to track customer and dollar retention of a startup using cohort analyses and why it matters

If you're new to VC, you’ve probably heard the term “cohort analysis” thrown around. But what exactly is it, and why do investors care?

Let’s talk about it!

What is Cohort Analysis?

Cohort analysis looks at groups of users (cohorts) over time to understand retention and behavior.

The key question: Who’s still using your product after 1 month, 3 months, etc.?
Why do we track by cohorts? Because product changes happen over time, and user behavior shifts with each iteration.

Why Investors Love Cohort Analysis

For early-stage startups, especially pre-revenue ones, this analysis helps investors gauge product stickiness before monetization kicks in.

If users stick around without being forced to pay, they’re finding value. And if they’re finding value, they’re more likely to convert into paying customers later on.

How to Run a Cohort Analysis

1. Pick the right metric – What user action best represents engagement? (Sign-ups, purchases, active sessions, etc.)

2. Pick a time period – Weekly, monthly, quarterly? Newer businesses may need shorter periods (e.g., weekly) for faster insights.

3. Set Period #1 as your baseline – This is the week/month/quarter where 100% of your cohort performs the tracked action (e.g., Month 1).

4. Track retention over time – Calculate the percentage of users still performing that action in each subsequent period.

5. Compare cohorts over time – Are new cohorts performing better or worse? Are retention trends improving?

Example Cohort Analysis

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