Returns & Metrics

What is ARR (Annual Recurring Revenue)?

Quick Answer

ARR is the annualized value of recurring subscription revenue, calculated as MRR × 12. It's the primary growth metric for SaaS companies, with VCs typically expecting 2-3x year-over-year growth for Series A candidates.

Detailed Answer

Annual Recurring Revenue (ARR) measures the predictable, recurring revenue a subscription business generates annually. It's the single most important metric for SaaS companies.

Formula: ARR = Monthly Recurring Revenue (MRR) × 12

What counts as ARR: - Subscription fees (monthly, quarterly, annual — all annualized) - Usage-based revenue (if predictable and recurring)

What does NOT count: - One-time fees (implementation, setup) - Professional services - Hardware/physical product revenue

ARR benchmarks for fundraising: - Pre-seed: $0-$100K ARR (idea/MVP stage) - Seed: $100K-$1M ARR - Series A: $1M-$3M ARR (with 2-3x YoY growth) - Series B: $5M-$15M ARR (with 1.5-2x YoY growth)

Related metrics: - **Net Revenue Retention (NRR)** — Measures expansion + churn. >120% is excellent. - **ARR per employee** — Efficiency metric. $100K-$200K is typical for growth stage. - **CAC Payback** — Months to recover customer acquisition cost from ARR.

Related Questions

What is IRR (Internal Rate of Return)?

IRR is the annualized return rate that makes the net present value of all cash flows equal to zero, accounting for the timing of investments and distributions. Top-quartile VC funds target 20-30% net IRR.

What is MOIC (Multiple on Invested Capital)?

MOIC is the ratio of total value returned to total capital invested, regardless of time. A 3x MOIC means investors received 3 times their money back. Top-quartile VC funds target 2.5-3.5x net MOIC.

What is burn rate?

Burn rate is the monthly rate at which a startup spends cash beyond its revenue. Gross burn is total monthly spend; net burn is spend minus revenue. Runway = Cash on Hand ÷ Monthly Net Burn Rate.

What is TVPI in venture capital?

TVPI (Total Value to Paid-In) measures the total value of a fund relative to the capital called from LPs. It combines realized returns (distributions) plus unrealized portfolio value (NAV). TVPI = (Distributions + NAV) ÷ Paid-In Capital.