Albert Einstein said, “Compounding is mankind’s greatest invention because it allows for the reliable, systematic accumulation of wealth” (source). This statement is often used in the context of investing in public company stocks with a set-it-and-forget-it approach. Money compounding annually at a single digit percentage rate (e.g. 5%) will generate a significant return, especially in the context of decades (invest $100 at a 9% interest rate and it’ll double in value in eight years based on the rule of 72).
Now, for fast growing startups, the stakes are even higher. If the business is growing at a sustained 50%+ per year over an extended period of time (e.g. 5 – 10 years), the scale and enterprise value of compounding growth becomes even more dramatic. Want to see what crazy growth rates look like at super scale? Load up Google Finance for Apple’s stock and set the timeframe to 10y (10 years).
Compounding is an impressive phenomena for regular growth assets. For startups with traction and explosive growth, the increase in enterprise value is unbelievable. Pay close attention to growth and don’t forget the power of compounding over time.
What else? What are your thoughts on the enterprise value from compounding growth in a startup?