Annual Recurring Revenue (ARR) is the total annualized value of a company’s customer contracts. ARR is one of the most popular revenue metrics for SaaS business, because it represents the likely revenue current customers will produce over the next year. For a one year contract with no expansion or contraction, ARR would equal the revenue from that customer for the year. If there is expansion or contraction, ARR reflects the revenue that would be received if the most recent version of the contract continues for another year. Therefore:
ARR = MRR X 12
ARR is most appropriate for SaaS that primarily sell annual contracts since it’s most predictive of for companies with relatively infrequent logo churn. However, it can also be used for businesses with monthly or quarterly contracts, as long as it’s analyzed in conjunction with retention rates to get a full picture of customer behavior. ARR can even be used for usage-based businesses, though in that case it’s better called Annualized Run Rate to indicate that there’s no assumption that the revenue will recur.
Benchmarks: ARR and ARR growth are some of the most important metrics used by VCs. As a rule of thumb, investors are seeking:
Series A: $1m+ ARR, 3x Year over Year Growth (10% CMGR)
Series B: $5m+ ARR, 2.5x Year over Year Growth (8% CMGR)
Series C: $10m+ ARR, 2x Year over Year Growth (6% CMGR)
It’s important to note that VCs are typically seeking to invest in companies with top decile growth rates and consider many factors when making investments. Companies that don’t hit these benchmarks can still get funded, or continue to grow their businesses with non-venture capital.