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Growth Investing Glossary

Quick definition: A comprehensive reference of essential terms and metrics used to evaluate growth companies, from revenue models and unit economics to valuation frameworks and founder characteristics.

This glossary consolidates the vocabulary of modern growth investing. Whether you're analyzing a SaaS company's retention rates, assessing a founder's track record, or calculating a stock's valuation multiple, you'll find clear, practical definitions here. Each term is anchored to real investment decisions and appears throughout this chapter's lessons on compounders, disruption, and sustainable growth.

ARR​

Annual Recurring Revenue. The predictable revenue a subscription-based business generates in a twelve-month period, typically reported for SaaS and other recurring-revenue models. ARR excludes one-time fees and is calculated by multiplying the monthly recurring revenue (MRR) by twelve. Growth investors prize ARR because it reflects revenue visibility, customer stickiness, and the ability to forecast future earnings. A company growing ARR at 30% annually while expanding gross margins demonstrates both topline momentum and operating leverage—two hallmarks of compounders.

Acquisition​

The process of winning new customers, measured by acquisition cost (CAC) and acquisition rate relative to the addressable market. Strategic acquisitions of other companies also fall under this term, though here the focus is customer acquisition. Growth companies typically invest heavily in acquisition during periods of market expansion, accepting near-term profitability to capture market share. The sustainability of growth depends on whether acquisition economics improve over time—lower CAC through brand recognition, distribution scale, or product virality—or stagnate.

Burn Rate​

The rate at which a company consumes cash before reaching profitability, typically expressed as monthly cash burn. Early-stage growth companies often run at high burn rates while scaling revenue, betting that revenue growth will eventually exceed cost growth. Investors monitor burn rate against the runway (months of cash remaining) to assess survival risk and dilution likelihood. A burn rate that decelerates relative to revenue growth—the magic number improving—signals discipline and potential path to profitability.

CAC​

Customer Acquisition Cost. The total sales and marketing expense divided by the number of new customers acquired in a period, expressed as a dollar figure per customer. A software company spending $100,000 on sales and marketing to acquire 50 customers has a CAC of $2,000. Growth investors compare CAC to lifetime value (LTV) to assess unit economics: a 3:1 LTV/CAC ratio is considered healthy, while a 5:1 or higher ratio indicates expanding profitability on each customer relationship. CAC payback period—how quickly a customer's contribution covers acquisition cost—is equally important for assessing cash flow efficiency.

CAGR​

Compound Annual Growth Rate. The rate at which an investment, revenue stream, or metric grows annually over a multi-year period, smoothing volatility. A company with revenue of $10 million five years ago and $50 million today has a CAGR of approximately 38%. CAGR is the growth investor's lens for evaluating consistency: a 30% CAGR over five years is more impressive than one year of 100% growth followed by stagnation. When assessing compu nders, investors look for decades of double-digit CAGR as evidence of durable competitive advantages.

Churn​

The percentage of customers or revenue lost in a given period, typically expressed as monthly or annual churn rate. A SaaS product with 100 customers at month start, 8 customers lost, and 15 new customers acquired ends the month with 107 customers and an 8% monthly churn rate. High churn signals weak product-market fit, pricing misalignment, or competitive displacement. Conversely, low churn—below 5% monthly for enterprise SaaS—indicates sticky products, strong customer satisfaction, and predictable revenue. Churn is a leading indicator of revenue growth sustainability and directly impacts lifetime value calculations.

Compounder​

A business that reinvests profits at high returns on invested capital (ROIC), thereby accelerating the rate at which the company grows its earnings and intrinsic value. Compounders are characterized by recurring revenue, strong margins, durable competitive advantages, and founder discipline. Classic examples include Berkshire Hathaway (insurance and cash generation reinvested), Adobe (transition from licensed software to SaaS), and long-term software companies with expanding markets. The compounding effect is exponential: small differences in reinvestment rate and ROIC compound into vast differences in shareholder value over decades.

Disruption​

The process by which a new product, technology, or business model displaces an incumbent industry leader or category. Disruption in growth investing refers not just to technological change but to fundamental shifts in customer behavior, unit economics, or competitive dynamics. Cloud computing disrupted on-premise software; SaaS disrupted perpetual licensing; mobile-first apps disrupted desktop workflows. Growth investors hunt for companies riding waves of disruption—those enabling the new paradigm or implementing the new technology faster than legacy competitors can adapt. Disruption creates windows of opportunity where high growth and expanding margins coexist.

EV/Sales​

Enterprise Value divided by Sales. A valuation multiple expressing the market's willingness to pay for each dollar of revenue. A company with a $100 million market cap and $50 million in sales trades at 2.0x EV/Sales. EV/Sales is useful for comparing growth companies at different profitability levels or pre-profitability stages, since it bypasses earnings and focuses on the absolute top line. High-growth software companies often trade at 10x+ EV/Sales, reflecting expectations of high margins and expanding ROIC. The danger lies in extrapolating growth indefinitely; as growth slows, multiples compress rapidly.

Founder-led​

A company whose founder remains the CEO or closely involved in strategic decisions, often associated with stronger alignment of founder incentives with shareholder interests. Founder-led companies like Amazon (Jeff Bezos until 2021), Berkshire (Warren Buffett), and Microsoft (under Bill Gates) have delivered exceptional returns over decades. Founders tend to play longer, prioritize sustainable competitive advantages over short-term earnings, and maintain unique strategic visions. When founders depart—especially suddenly—growth investors reassess the company's culture, decision-making framework, and risk of strategic drift.

GARP​

Growth at a Reasonable Price. An investment philosophy balancing growth rate with valuation, seeking high-growth companies that aren't priced at extreme multiples. A GARP investor buys a company growing earnings at 25% annually and trading at a P/E of 20x (PEG of 0.8), but avoids a company with identical growth trading at 60x earnings. GARP reflects the practical reality that no growth is infinite: paying too much for growth invites disappointment when that growth decelerates. The strategy requires discipline, distinguishing between companies trading at premiums because growth is accelerating versus those priced at frothy multiples with no acceleration in sight.

Gross Margin​

Revenue minus cost of goods sold (COGS), expressed as a percentage of revenue. A SaaS company with $100 million in ARR and $30 million in direct hosting, payment processing, and support costs has a 70% gross margin. Gross margin indicates pricing power, manufacturing efficiency, or software economics. Growth companies typically feature gross margins of 60-80% (software) or 30-50% (hardware), and investors watch for margin expansion as scale improves. Gross margin contraction during a growth phase is a red flag suggesting pricing pressure, competitive intensity, or rising input costs that offset topline growth.

Growth at a Reasonable Price​

See GARP.

Hyperscaler​

A company that has achieved massive scale—typically billions in revenue—while maintaining very high growth rates of 20%+ annually, often serving global markets with network effects or platform dynamics. Amazon, Microsoft Azure, and Alibaba are hyperscalers, leveraging cloud infrastructure, global distribution, and data moats to sustain growth beyond most companies' ceiling. Hyperscalers are characterized by extreme reinvestment (capex for data centers, logistics, R&D) and delayed profitability, yet they expand addressable markets so dramatically that long-term shareholders benefit enormously. For growth investors, hyperscalers represent the ultimate prize: a company that scales globally while compounding capital at extraordinary rates.

IPO​

Initial Public Offering. The moment a private company sells shares to the public and lists on a stock exchange. The IPO sets an initial market valuation and provides liquidity for early shareholders, employees, and founders. From a growth investing perspective, the IPO is often the beginning of intensive scrutiny: the company must now meet quarterly guidance, withstand analyst scrutiny, and navigate public markets' shorter time horizons. Many growth companies deliver exceptional returns post-IPO (Amazon, Microsoft, Netflix) while others disappoint as growth decelerates or execution falters. IPO timing, founder retention, and strategic focus are all critical determinants of post-IPO success.

LTV/CAC​

Lifetime Value divided by Customer Acquisition Cost. A unit economics ratio measuring how much profit a customer generates relative to the cost to acquire them. An LTV/CAC ratio of 3:1 means a company earns $3 in lifetime profit for every $1 spent acquiring a customer, a healthy threshold for sustainable growth. Higher ratios (5:1, 10:1) indicate exceptional unit economics and strong operating leverage; lower ratios (1:1, 2:1) suggest profitability is fragile and growth is unsustainable at current CAC levels. Growth investors use LTV/CAC to distinguish between companies printing money through efficient scaling versus companies acquiring customers below cost.

Magic Number​

The ratio of net new ARR generated in a quarter to the total sales and marketing spend in the preceding quarter, measuring SaaS sales efficiency. A magic number of 0.75 means a company earned $0.75 in new ARR for each $1 of S&M spend—a strong signal of operational excellence. Magic numbers above 0.75 indicate accelerating efficiency, often driven by product-market fit, brand recognition, and improving conversion. Magic numbers below 0.5 suggest the company is burning S&M spend without proportional return and must either improve product, pricing, or market strategy. The metric is especially useful for comparing SaaS companies at similar scale and maturity.

Market Cap​

The total market value of a company's outstanding shares, calculated as share price multiplied by shares outstanding. A company trading at $100 per share with 100 million shares outstanding has a market cap of $10 billion. Market cap determines a company's weighting in indexes, influences options liquidity, and sets the scale of markets an investor can access. For growth investors, market cap is a lens for opportunity: smaller caps offer greater growth upside but higher volatility and research burden, while mega-cap growth stocks offer lower volatility but slower multiples expansion.

Moat​

A durable competitive advantage that protects a company's market position and pricing power from competitors, also called an "economic moat." Moats can be network effects (Instagram's user and advertiser base), switching costs (enterprise software systems), scale advantages (Amazon's logistics), brand power (Apple's ecosystem), or proprietary technology (semiconductor fabrication). The strongest compounders possess widening moats: as they grow, their competitive position strengthens, creating a virtuous cycle. Moat analysis is central to growth investing because growth without a moat is temporary; a company can outgrow competition only if protected from replication.

Multi-bagger​

A stock that returns multiple times the initial investment—a 5-bagger returns 5x, a 10-bagger returns 10x. Peter Lynch popularized this term to emphasize that long-term wealth in growth stocks comes from holding winners through years of compounding, not from rapid trading. Most multi-baggers take 5-10 years to unfold, reflecting the time required for a growth company to expand its addressable market, achieve profitability, and compound earnings. Identifying multi-bagger candidates early requires both conviction in secular trends and patience to hold through volatility.

Network Effect​

The phenomenon whereby a product becomes more valuable to each user as the number of users increases, creating exponential growth and high switching costs. Facebook's value is proportional to how many of your friends use it; a messaging app with 10 million users is worth far more than one with 100,000. Network effects are among the strongest moats in growth investing, creating self-reinforcing adoption loops and high customer retention. Platforms with network effects (Stripe, Twilio, Shopify in their ecosystems) can achieve rapid TAM expansion and durable competitive advantages, making them prime compounder candidates.

Operating Leverage​

The phenomenon whereby operating expenses grow slower than revenue as a company scales, causing profitability to accelerate. A software company might grow revenue at 40% annually but grow total costs only 20%, as fixed costs (infrastructure, executive overhead) are spread across a larger revenue base. Operating leverage is the engine of software company compounding: once a company reaches scale, incremental revenue drops to the bottom line, driving ROIC expansion and valuation multiple increases. Investors scrutinize operating leverage by comparing gross margin expansion, R&D spending as a percentage of revenue, and S&M efficiency over time.

Organic Growth​

Revenue growth generated from selling more products to existing and new customers, excluding revenue from acquisitions of other companies. Organic growth is the purest measure of competitive strength and business health; a company growing 30% organically is outcompeting rivals, while a company growing 30% through acquisitions may be masking stagnation in core operations. Growth investors prefer organic growth because it reflects repeatable unit economics and defensibility, whereas acquisition-driven growth is finite (there are only so many targets to buy) and often destroys shareholder value through overpayment.

PEG Ratio​

Price-to-Earnings Growth Ratio. The stock's P/E ratio divided by its expected annual earnings growth rate. A company trading at 40x P/E with 40% expected earnings growth has a PEG of 1.0 (expensive relative to growth), while one at 40x P/E with 80% expected growth has a PEG of 0.5 (cheap relative to growth). PEG ratios below 1.0 are considered undervalued, though the metric is only as good as growth assumptions. The danger of PEG is extrapolating growth rates too far into the future; a company with spectacular 50% growth for 5 years will eventually hit a ceiling, at which point high PEG stocks compress sharply.

Peter Lynch​

An legendary growth investor and former manager of the Magellan Fund (1977-1990) who achieved a 29% average annual return, one of the best records in history. Lynch championed the idea of investing in stocks you understand ("invest in what you know"), encouraged retail investors to conduct their own research ("do your homework"), and popularized the PEG ratio. His book "One Up on Wall Street" remains a growth investing classic, emphasizing the importance of identifying multi-bagger opportunities in ignored or misunderstood companies. Lynch's philosophy balanced growth analysis with valuation discipline, a core principle of modern growth investing.

Philip Fisher​

A pioneering growth investor (1907-2004) who developed the "scuttlebutt" method and authored "Common Stocks and Uncommon Profits" (1957), a foundational text in growth investing. Fisher focused on companies with strong competitive positions, visionary management, and high profit margins, and he held positions for decades to compound returns. His emphasis on qualitative factors—founder vision, company culture, long-term R&D investment—predated modern growth investing by decades and remains influential today. Fisher demonstrated that growth investing could deliver returns rivaling value investing by identifying companies early in their growth curves and maintaining conviction.

Pipeline​

The backlog or forecast of future customer contracts, sales, or ARR that are committed or highly likely to close in future periods. A SaaS company's sales pipeline represents future revenue visibility; a pipeline of $50 million for a company with $20 million in annual revenue signals strong growth ahead. Pipeline is a forward-looking metric that precedes actual revenue recognition, making it crucial for assessing whether a company is maintaining growth momentum. However, pipeline estimates can be inflated; savvy investors look at close rates (percentage of pipeline that actually converts to revenue) and average deal size trends over time.

Pricing Power​

The ability to raise prices without losing customers proportionally, indicating strong differentiation, switching costs, or market dominance. A software company that increases prices 15% annually and retains 95% of customers has exceptional pricing power, a sign of durable competitive advantage. Conversely, a company that cannot raise prices despite strong growth may be commoditizing (competing on price) or losing moat. Pricing power is often the last thing to erode in a competitive industry; investors watch for pricing pressure as an early warning sign of disruption or commoditization.

Profitability Runway​

The number of months a pre-profitable company can continue operating at its current burn rate before exhausting cash reserves, assuming no additional funding. A company with $100 million in cash and a $5 million monthly burn has a 20-month runway. Runway is critical for early-stage growth companies: those with long runways (24+ months) can weather downturns and invest in growth; those with short runways face dilution risk if growth slows and capital markets tighten. Profitability runway often shrinks as companies scale (burn rate accelerates) unless revenue growth accelerates proportionally.

R&D​

Research and Development. The expenses a company incurs developing new products, improving existing offerings, or exploring adjacent markets. Growth companies typically invest 10-20% of revenue in R&D, higher than mature companies, to maintain innovation and competitive advantage. R&D spending is an indicator of management's commitment to long-term growth: companies cutting R&D to meet short-term earnings targets are often in secular decline. Investors examine R&D efficiency—whether spending translates to successful product launches and market expansion—and compare R&D intensity across peers to assess competitive positioning.

ROIC​

Return on Invested Capital. A measure of how much profit a company generates for each dollar of capital invested (equity plus debt), expressed as a percentage. A company with $1 billion in invested capital and $200 million in operating profit has a ROIC of 20%. ROIC is the ultimate measure of business quality: companies with ROIC above 15% are genuinely durable; those above 20% are exceptional. The best compounders maintain high ROIC (15%+) while growing, allowing them to reinvest at high rates and accelerate growth. ROIC is also the denominator of compounder returns: given equal reinvestment rates, a company with 25% ROIC grows far faster than one with 12% ROIC.

Reinvestment Rate​

The percentage of earnings that a company reinvests in the business rather than distributing to shareholders as dividends. A company with $100 million in earnings that retains $80 million for growth and distributes $20 million in dividends has an 80% reinvestment rate. High reinvestment rates are characteristic of growth companies, especially early-stage businesses plowing profits back into product, market expansion, or infrastructure. The compounding formula—growth equals reinvestment rate times ROIC—shows that growth is a function of both willingness to reinvest and the returns earned on that capital.

Rule of 40​

A heuristic that a healthy, mature SaaS company's revenue growth rate plus profit margin should sum to at least 40%. A company growing 30% with a 10% operating margin (Rule of 40: 30 + 10 = 40) is balanced between growth and profitability. A company growing 50% but burning cash violates the rule, suggesting unsustainable spending; one growing 10% with a 35% margin suggests insufficient growth investment. The Rule of 40 helps distinguish between companies optimizing growth, profitability, or both, and is particularly useful for assessing mature SaaS companies balancing shareholder returns with market expansion.

SaaS​

Software as a Service. A business model in which software is delivered to customers via the internet on a subscription basis rather than through perpetual licensing or on-premise installation. SaaS businesses have become the dominant model for enterprise software (Salesforce, Slack, Datadog) and consumer applications (Netflix, Spotify), offering predictable recurring revenue, low marginal costs, and high gross margins. SaaS is the native environment of modern growth investing, as the model aligns incentives (customers stay only if they derive value), creates retention metrics, and enables global scaling without physical infrastructure.

Scalability​

The ability of a business to grow revenue significantly without proportional increases in costs, especially relevant for software and platform businesses. A SaaS product with scalable architecture can add thousands of customers with minimal additional server cost; a consulting firm cannot scale without proportionally adding consultants. Scalability is essential for compounders because it enables the operating leverage that transforms 40% revenue growth into 60%+ earnings growth. Investors assess scalability by examining gross margins (higher margins indicate lower friction to growth), CAC payback periods (quick payback means capital can be redeployed to new customers), and infrastructure flexibility.

Scuttlebutt​

A research method pioneered by Philip Fisher in which an investor directly interviews customers, competitors, suppliers, and employees to gather qualitative insights about a company's competitive position, product satisfaction, and growth trajectory. Scuttlebutt (originally naval slang for gossip) is distinguished from formal due diligence in that it captures unfiltered perspectives and early signals of competitive shifts, product issues, or market momentum. Growth investors practicing scuttlebutt might visit a company's offices, speak with customers, attend industry conferences, or interview former employees to build conviction in a thesis. The method requires patience but can surface insights that financial statements alone cannot.

TAM​

Total Addressable Market. The total revenue opportunity available if a company captured 100% of its target market, typically expressed in billions of dollars. A company selling security software to Fortune 500 companies might have a TAM of $50 billion (estimating all enterprise security spending); one selling to SMBs might have a TAM of $500 billion or more if defined broadly. TAM is crucial for growth investors because it bounds opportunity: a company with a $1 billion TAM that has already captured $300 million in revenue has limited runway, while one with a $100 billion TAM and $300 million in revenue has room for 10x+ growth. TAM expansion—penetrating new verticals, geographies, or use cases—is a hallmark of durable compounders.

Tenbagger​

A stock that returns ten times the initial investment over a multi-year period, a goal of many growth investors. Tenbaggers typically require both exceptional business quality (compounder characteristics) and patient capital. Most tenbaggers take 7-15 years to unfold, reflecting the time required for a growth company to scale from mid-sized to large-cap. Historical examples include Microsoft (1990s), Amazon (2000s), and Nvidia (2010s). The odds of selecting a tenbagger are low, but the payoff is enormous; growth investors expect most positions to be singles or doubles, with a handful of tenbaggers driving portfolio returns.

Total Addressable Market​

See TAM.

Unit Economics​

The profitability metrics of a single customer relationship, typically expressed as LTV/CAC ratio, CAC payback period, and gross margin per customer. Strong unit economics—an LTV/CAC ratio above 3.0 and a payback period below 12 months—indicate a business where growth is profitable and repeatable. Weak unit economics—below 2:1 LTV/CAC or a payback longer than 24 months—suggest the business model is fundamentally challenged. Unit economics are often ignored in early-stage hypergrowth companies but eventually determine whether growth is durable. As companies mature, unit economics improvement (lower CAC, higher LTV) often precedes profitability inflection and shareholder value creation.

Key Relationships in Growth Company Metrics​

Below is a visual representation of how the most critical growth metrics interconnect and drive compounder returns:

This flowchart illustrates how unit economics (CAC/LTV and churn) feed revenue growth, how strong returns on capital (ROIC) and reinvestment rates drive compounding, and how widening moats protect both growth and profitability. Companies excelling in all three dimensions—efficient customer acquisition, high capital returns, and sustainable competitive advantages—generate the exponential wealth creation that defines growth investing.

Continue Reading​

  • What Is Growth Investing? — Explore the foundational philosophy and historical roots of growth investing, from Philip Fisher to modern practitioners.

  • What Modern Growth Means — Understand how growth investing has evolved in the age of SaaS, software, and platform businesses.

  • What Is a Compounder? — Dive deeper into the characteristics, metrics, and examples of durable compounder businesses that drive long-term shareholder returns.