Good morning 👋
Nobody knows what ARR actually means anymore.
More and more, when you lift the curtain, you find that a lot of that “recurring” revenue isn’t so “recurring” after all, and the spillover effects give the venture asset class a bad reputation.
Dan Gray (one of my new favorite accounts) gave his two cents …
TOP
What’s ARR (actually)?
Dan is one of the best accounts I follow, and he said the quiet part out loud in this tweet.
ARR used to be used as a proxy for the growth and quality of a company; now nobody knows what “ARR” actually means.
To quote Bill Gurley, not all “recurring revenue” is created equal. To quote Dan Gray:
Is it a monthly subscription — paid annually — for a finance tool that is deeply integrated in the operations of customers?
Or is it monthly “experimental revenue” for a new AI tool, where many registered and ‘paying’ users are actually on free trials with a spurious conversion rate?
The “annual recurring revenue” moniker obfuscates a lot of important detail — which “annual run rate” does not hide from. It has helped make investors lazy.
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POLL
Do you still use ARR as a proxy before making an investment?
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- Clay
(Founder @ Confluence.VC | GP @ Outlaw)
