What is ARR and why does it matter to VCs?

ARR — Annual Recurring Revenue — is calculated by taking a company's current monthly recurring revenue (MRR) and multiplying by 12. For a company with $500K MRR, the ARR is $6M.

ARR matters to VCs for several reasons:

**Predictability.** Unlike one-time revenue, ARR is contracted and recurring. It's a forward-looking signal of what the business will earn over the next year if nothing changes (no new customers, no churn). That predictability makes it more valuable than equivalent non-recurring revenue.

**Valuation anchor.** SaaS companies are typically valued as a multiple of ARR — especially at growth stage. "ARR multiple" varies dramatically by growth rate, retention, margin, and market conditions. In peak 2021 markets, fast-growing SaaS companies traded at 50–100x ARR; in 2022–2023, multiples compressed to 5–10x for most companies.

**Growth signal.** YoY ARR growth rate is often the single most important metric in early-stage VC diligence. Benchmarks vary, but the "T2D3" framework (triple, triple, double, double, double) was the informal gold standard for $1M+ ARR SaaS companies targeting top-tier VC investment.

**Cohort health.** ARR growth alone can be misleading if churn is high. Net Revenue Retention (NRR) — how much existing ARR expands or contracts over time — is the complementary metric VCs use to assess whether ARR growth is real.