Compounding Revenue 20% Per Year

Two years ago one of the most successful software investors in the country told me he’d never sell a SaaS business that was growing 20% per year, especially if it looked like it would grow that way indefinitely. Last month, another extremely successful investor said he just wants to invest in great companies that grow 20% per year, and doesn’t like the current mentality of growth at all costs. Clearly, there’s something more experienced investors see that isn’t appreciated enough: the power of compounding.

Let’s take a look at a couple of examples:

$10 million revenue start

  • Year 1 – $12 million
  • Year 2 – $14.4 million
  • Year 3 – $17.3 million
  • Year 4 – $20.7 million
  • Year 5 – $24.9 million
  • Year 6 – $29.9 million
  • Year 7 – $35.8 million
  • Year 8 – $43 million
  • Year 9 – $51.6 million
  • Year 10 – $61.9 million

$100 million revenue start

  • Year 1 – $120 million
  • Year 2 – $144 million
  • Year 3 – $173 million
  • Year 4 – $207 million
  • Year 5 – $249 million
  • Year 6 – $299 million
  • Year 7 – $358 million
  • Year 8 – $430 million
  • Year 9 – $516 million
  • Year 10 – $619 million

Growing revenue 20% per year for 10 years results in a 5x overall growth — the compounding effect is impressive, especially in the later years. When looking at these examples, it’s clear that growing much faster in the early years is necessary to get to a larger base by the time the 20% annual growth years set in.

Now, thinking in terms of SaaS, there’s a secret weapon that can make this compounding revenue phenomenon even more attainable: positive net dollar retention. Net dollar retention is the revenue renewal amount plus upsell/cross sell minus churned revenue. Put another way, ensure that existing customers buy more product than the amount non-renewing customers stop spending so that that the business grows forever, without signing a new customer. If you can grow new customer revenue 10% per year organically, and 10% per year with net dollar retention, that’s 20% growth. Now, do that for 10 years and you’ve quintupled the business.

Compounding is hard to appreciate for most people, especially many years out in the future. Build a business that grows fast to some level of scale, and work on the underlying fundamentals to compound revenue 20% per year indefinitely.

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