Annual Recurring Revenue (ARR): What is it and why does it matter?
What Is ARR (Annual Recurring Revenue)?
ARR represents the predictable, recurring income your business generates within a 12-month period, excluding any one-time charges or variable fees.
Commonly used by subscription-based models like SaaS (Software as a Service), ARR simplifies how you track growth over time.
If your monthly subscription costs £100 and you have 100 subscribers, then your monthly recurring revenue (MRR) is £10,000, which translates to £120,000 in ARR.
Why does ARR matter to startup investors?
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Predictability: Investors love consistent revenue streams. By showing a dependable ARR, you demonstrate the stability needed to drive confidence in your startup valuations.
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Scalability: ARR highlights growth potential. If your subscriber base or contract renewals keep rising, your valuation will likely follow suit.
- Benchmarking: ARR serves as a baseline for revenue multiples—one of the most popular methods for startup valuations. By applying a suitable revenue multiple to your ARR, you can gauge what your business might be worth in the eyes of potential investors.
How do you calculate ARR correctly?
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Exclude One-Time Sales: ARR should only include recurring revenue. One-off fees or project-based incomes can inflate your figures and mislead investors.
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Consider Churn: Keep tabs on cancellations or non-renewals. Investors look closely at churn rates to ensure your ARR remains healthy over time.
- Account for Upgrades and Downgrades: If your customers frequently change their subscription plans, factor that into your ARR to present an accurate snapshot of growth.
How do you present ARR in a pitch deck to raise investment?
A compelling pitch deck is the backbone your funding round. If you are a SaaS business, an investor will expect to understand your ARR, and it's important to present this metric in your pitch deck. Need a pitch deck? We can help. Learn more.
