Key takeaways
- ARR counts recurring contracts only, at their annual value.
- Definitions vary, so ask what is included before comparing two companies.
- Run-rate revenue and ARR are not the same thing.
How ARR is calculated
For a company billing monthly, ARR is usually current MRR times 12. For a company selling annual contracts, it is the sum of the annual value of every active contract. A $36,000 three-year contract billed yearly contributes $12,000. One-off implementation fees, services and hardware are left out.
An example of an ARR claim changing
A deck shows $480,000 ARR from 20 enterprise customers. In the founder interview, the founder explains that 12 of those customers are unpaid pilots, priced at what they would pay on conversion. Paid ARR is the figure from the other eight. A careful fund keeps both statements, asks for contracts, and writes the memo from paid ARR, noting the pilots separately.
How ARR is checked in diligence
- Ask for the written definition and the date the figure was measured.
- Reconcile it to a billing export or invoices, customer by customer.
- Check whether signed but not yet live contracts are included.
- Look at concentration: how much ARR comes from the largest three customers.
Delsivo's claim tracker, planned for the Pilot release, keeps each version of an ARR claim with its definition, period and source, and labels it Founder reported, Corroborated, Disputed or Unresolved.
Common confusions
- ARR versus annual revenue: revenue under accounting rules includes non-recurring items and follows recognition rules.
- ARR versus run-rate: run-rate annualises any recent revenue, recurring or not.
- Contracted ARR (sometimes CARR) includes signed contracts not yet billing, and should be labelled as such.