Annual Recurring Revenue (ARR)
Annual Recurring Revenue (ARR) is your monthly recurring revenue (MRR) multiplied by 12. It represents the annualized value of your active subscriptions and is the primary metric used for SaaS company valuations. ARR is a run-rate, not actual trailing revenue.
Why Annual Recurring Revenue (ARR) Matters for SaaS Companies
ARR is the language of SaaS fundraising. VCs value companies as a multiple of ARR — typically 5-15x for Seed to Series B. Hitting ARR milestones ($1M, $5M, $10M) unlocks different fundraising tiers and investor pools. For founders, understanding where you are on the ARR curve determines your strategic options.
Formula
ARR = MRR x 12. Only include recurring subscription revenue. Exclude one-time fees.
Benchmark
Series A: typically $1-3M ARR. Series B: typically $5-15M ARR. These benchmarks shift with market conditions.
Tools for Measurement
An Operator's Take
ARR milestones are more than vanity metrics — they change what is possible for your business. At $1M ARR, you can raise a credible Series A. At $5M ARR with strong retention, Series B becomes viable. I have seen founders fixate on topline ARR growth when the components underneath were deteriorating. One company hit $4M ARR but was churning $800K per year — their real 'keep rate' ARR was $3.2M and declining. The milestone is meaningless if the foundation is eroding.
Common Mistakes
What I see go wrong at Seed to Series B companies.
Inflating ARR with one-time revenue, professional services, or variable usage fees that may not recur.
Reporting ARR without disclosing net new ARR. If you added $2M in new ARR but lost $1.5M to churn, net growth is only $500K.
Focusing on the ARR number instead of the growth rate and retention underneath it. $5M ARR with 20% churn is a leaky bucket.
What to Do This Week
Concrete steps you can take right now.
Calculate your clean ARR: MRR x 12, excluding all non-recurring revenue. Compare to what you have been reporting externally.
Track Net New ARR monthly: New ARR + Expansion ARR - Churned ARR. This is the real growth metric.
Map your ARR trajectory to fundraising milestones. At current growth rates, when do you hit the next milestone?
Related Resources
Try These Tools
Further Reading
Frequently Asked Questions
What is the difference between ARR and revenue?
ARR is an annualized run-rate based on current subscriptions. Total revenue includes ARR plus one-time fees, professional services, and any other income. A company with $5M ARR might have $6.5M in total revenue due to implementation fees. Investors focus on ARR because it represents predictable, recurring income.
What ARR do you need for Series A?
The typical Series A threshold is $1-3M ARR with strong growth (2-3x year-over-year) and good retention (NRR above 100%). Market conditions shift these benchmarks — in tight markets, the bar is higher. What matters more than the absolute number is the trajectory and the quality of the revenue (low churn, healthy unit economics).
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