Annual Recurring Revenue is the yearly value of a SaaS company's recurring subscriptions, calculated as MRR multiplied by 12. While MRR captures monthly momentum, ARR provides the annualized view that investors, board members, and acquirers use to benchmark and value subscription businesses. It is the standard metric for SaaS companies once they exceed $1M in annual revenue.
How It Works
The basic calculation is: ARR = MRR x 12. A company with $250K MRR has $3M ARR. For companies with primarily annual contracts, ARR is the sum of all active annual contract values. Like MRR, ARR excludes one-time fees, professional services, and variable usage charges. Only predictable recurring revenue counts.
ARR growth rate segments companies into performance tiers. Below 20% annual growth is slow. 20-50% is good for mature companies. 50-100% is strong for growth-stage. Above 100% year-over-year growth ("triple-digit growth") signals exceptional product-market fit.
Why It Matters
ARR is the primary valuation metric for SaaS companies. Public SaaS companies trade at multiples of ARR, anywhere from 5x to 30x depending on growth rate, retention, and margin. A company growing ARR at 100% year-over-year with 130% net revenue retention might command 25x ARR. The same company growing at 30% might trade at 8x.
For fundraising, ARR milestones map to funding stages. Seed: $0-500K ARR. Series A: $1-3M ARR. Series B: $5-15M ARR. These are rough benchmarks that shift with market conditions but provide useful orientation.
In Practice
A company crosses $1M ARR after 18 months. Their ARR breakdown shows $400K from annual enterprise contracts and $600K from monthly subscriptions (annualized). Growth has been 15% month-over-month, projecting $3.5M ARR in 12 months if sustained. This trajectory positions them well for a Series A raise in 6 months when they approach $2M ARR.
Common Mistakes
Do not annualize a single strong month. If December MRR spikes due to year-end deals, using December x 12 overstates true ARR. Use trailing average MRR or current normalized MRR for honest reporting. Also avoid including revenue from customers unlikely to renew. A churning $100K enterprise contract should not inflate your ARR. Be consistent in what you include and transparent with investors about methodology.