One of the most profound forward-looking concepts is the power of compounding value. I’ve mentioned the idea several times before, and it’s worth repeating many more. Let’s take the simple example:
- Start with $1,000 of value today
- Compound at 5% annually
- After five years you get $1,276
Now, expand that value in a hyper-growth ( > 50%) fashion:
- Start with $1,000 of value today
- Compound at 50% annually
- After five years you get $7,594
By growing at 50% per year instead of 5% per year, there’s 6x the value in only five years. Carry it out further in the future and the multiple becomes even more dramatic.
Finally, apply the compounding value concept to ownership in a startup with a much larger dollar base and fast growth rates. The SaaS valuation growth rate multiplier shows the importance of growth, and the corresponding compounding value, in a startup. Combine that with Tomasz Tunguz’s When Should I Sell and it’s clear how to create real value.
Do the simple math. Run the numbers around compounding value and appreciate just how powerful it is to create incredible value over time.
What else? What are some more thoughts on compounding value over time?
David Cummings on Startups 