What is annual recurring revenue (ARR)?
ARR, or Annual Recurring Revenue, is a financial metric that measures the amount of revenue that a company generates on a recurring basis from its subscription-based products or services over a 12-month period. It is calculated by taking the total revenue that a company generates from its recurring revenue streams in a given year and dividing it by the number of customers it has.
Why does calculating ARR matter for start-ups?
ARR is a popular metric among venture capitalists (VCs) because it provides a clear indication of the growth and stability of a company's revenue streams. VCs are typically looking for start-ups that have strong growth potential and are able to generate predictable and recurring revenue. ARR can be a useful indicator of a company's ability to do this, as it reflects the recurring revenue that a company generates from its existing customer base.
In addition, ARR can be useful for start-ups looking to raise funding, as it provides investors with a clear understanding of the company's revenue streams and growth potential. Start-ups with strong ARR growth are often more attractive to investors, as they may be more likely to generate consistent and predictable returns over the long term.
Overall, ARR is a valuable metric for start-ups and VCs as it provides insight into the growth and stability of a company's revenue streams, and can be a useful indicator of a company's potential for long-term success.