What is Compound Annual Growth Rate (CAGR)?
Nexa Consultancy | Startup & Finance Glossary
The Compound Annual Growth Rate (CAGR) is a business and investing metric that represents the mean annual growth rate of an investment or a key performance indicator over a specified period longer than one year. It smooths out the volatility of year-over-year growth rates to provide a single, representative growth number.
For Startups: Startups use CAGR to showcase their revenue or user growth to investors in a clear and consistent manner. While early-stage growth can be erratic, calculating the CAGR over a 2-3 year period can provide a powerful illustration of the company's growth trajectory. It's a more sophisticated metric than simple average growth.
Calculation: CAGR = [(Ending Value / Beginning Value)^(1 / Number of Years)] - 1.
Example: A company's revenue grew from ₹1 Crore to ₹5 Crore over three years. The CAGR would be [(5/1)^(1/3)] - 1 = 71%. This shows the business grew at an average rate of 71% per year.