Compounding growth is powerful. Even a modest improvement in monthly growth can lead to order-of-magnitude differences in a startup's final outcome. Consider this: a company growing at 15% monthly over four years will be 8x larger than one growing at 10%.
Let that sink in. It's an amazing difference. More than anything else, consistent and compounding growth drives the gap between the iconic companies that break out and those that muddle along toward mediocrity.
To my mind, no measure is more useful than sustained monthly growth. There are dozens of ways to measure a startup, and each has its place. But nothing is as helpful in evaluating startups across different industries and business models. It is important whether the company is building a consumer product or one for businesses—or creating a consumer, marketplace, infrastructure, eCommerce, or SaaS product.
The impact is striking over periods as short as one or two years, which is the time a typical seed-stage round is meant to covers. The chart below shows three monthly-growth scenarios over two years.
You can see how large the gap grows over these first two years. A company with 20% monthly growth is nearly an order of magnitude larger than one whose monthly growth rate is just half as fast. The gap only widens if you consider growth over longer periods of time.
So what level of growth should startups target? The short answer is it depends on their stage. Young companies grow faster as they capture early adopters. Rates of growth slow as companies mature, following a predictable S-Curve (a logistic function). Seed- and early-stage financing happens near the start of that curve, when growth rates are at their peak.
I compiled data on some of the most successful companies in venture history to put some measure around this. I included Google, Amazon, Apple, Airbnb, WhatsApp, and Facebook. The first four focused on revenue growth from the beginning, while the latter two focused on user adoption. I measured either revenue or user growth as appropriate.
All six followed a pattern of peak growth near the beginning of their life, with aggressive but slowing growth after that. These companies represent the performance watermarks most startup founders (and their investors) aim to achieve.
A few rough rules of thumb can be taken away about building a huge, iconic company.
- Seed stage. Consistently drive around 20% monthly growth in either revenue or usage
- Series A. 15% monthly growth
- Series B. 10% monthly growth
Obviously, higher numbers are always better—who doesn't want to build the next Google?
Equally important is to understand your growth-rate danger zone. If you come into an early seed round with $170,000 in ARR, and you know you have 24 months to reach $5,000,000 to prepare for a Series A, you should also know the 10% monthly growth will not get you there. And while 15% will, you'd achieve it just in the nick of time—better to aim higher to buffer against obstacles along the way.
This simple table may help you think about what you need to be driving to hit your milestones. Calculate the monthly growth targets that are right for your startup.
Growth is not the only performance metric that matters, of course. Revenue quality matters, such as organic and purchased growth, margins, churn, and so forth. User growth must consider frequency and time spent engaged, rates of loss and retention, etcetera. While there are dozens of metrics to consider, which ones matter depends on the nature of the business.
But remember this: For most startups, compounding growth is the most important metric of all.