CAGR smooths out year-to-year volatility and expresses multi-year growth as a single annual rate.
CAGR = (End Value / Start Value)^1 / n - 1
where n is the number of years.
Why CAGR Is Better Than Simple Average
Suppose a metric grew: Year 1 +50%, Year 2 −33%, Year 3 +50%. - Simple average growth: (+50 − 33 + 50) ÷ 3 = +22.3% - Actual result: 1.5 × 0.67 × 1.5 = 1.507 — a 50.7% gain over 3 years - CAGR: 1.507^(1/3) − 1 = 14.7% (more accurate)
CAGR in Practice
- ARR CAGR: "We grew from $1M to $4M ARR in 3 years — what's our CAGR?" → 58.7%
- Revenue benchmark: T2D3 (Triple-Triple-Double-Double-Double) implies a ~40% 5-year CAGR from $1M ARR
- Investment return: "I invested $100k in 2019 and it's worth $200k in 2024 — what's my annual return?" → 14.87% CAGR
CAGR Limitations
CAGR assumes smooth, steady compounding — it masks volatility. A company that grew 200% one year and shrank 50% the next has a CAGR of 0% but went on a dramatic ride. Always accompany CAGR with annual growth data to show the full picture.