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Understanding the Compound annual growth rate for SaaS businesses
Hello friends, welcome to Episode 49 of Good Buy. Today’s theme is:
Understanding the compound Annual Growth Rate for SaaS businesses- all in less than 250 words
Let’s dive in.
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The CAGR is a metric used by investors and founders to see their ROI. It’s the rate of return of an initial investment over a fixed time frame.
CAGR = ((ending value/initial value)^(1/n) - 1)) * 100%
Where ending value = final amount
Initial value = initial investment amount
n = number of years
For example, lets say you start the year at $10k and end the year at $15k, your CAGR is 50%
For startups seeking Series A or B funding, a CMGR of at least 15% below $1M ARR and 10% above $1M ARR is checked.
You can calculate your CAGR in this online calculator here (cagrcalculator.net)
The CAGR is important because it smooths out the fluctuations of the YoY growth. Year 1 can have a growth of 25%, then Y2 can have 15% and Y3 can have 17.5%.
These spikes are smoothened out by the CAGR which will give you a an average growth rate that’s compounded for these 3 years.
This is also particularly useful if you’re looking to invest in other avenues and want to compare which avenue is a better investment opportunity.
For example, you could look at two different departments in your business - growth & customer success. You see that the CAGR for growth is 22.5% over the last 2 years and that of customer success is 12%
You could make the claim that growth is a reliable channel for you to invest in. You could also study the CS graph and observe areas on how you could improve its CAGR
Since it breaks it down into clean numbers and abstracts away the noise, it can be a pretty powerful metric to keep in mind to grow your SaaS business.
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