Annual recurring revenue (ARR) is the yearly run rate from active subscription contracts—the headline metric for most B2B SaaS companies raising venture capital.

How it works

Multiply monthly recurring revenue (MRR) by twelve, or sum each customer’s annualized subscription value. Exclude professional services, usage spikes you do not expect to repeat, and pilot contracts without renewal expectation—though teams debate those exclusions in board meetings.

Net new ARR equals new logo ARR plus expansion minus churn and contraction. Investors chart ARR bridges quarter to quarter to see whether growth comes from new sales or ACV expansion. Early startups with monthly plans still report ARR for comparability.

Why it matters

• Founders: Align sales, finance, and marketing on one ARR definition before investor updates. Changing rules mid-year destroys credibility.
• Investors: ARR quality matters as much as level—logo churn, concentration, and paid pilot conversion affect multiples.
• Operators: Comp plans tied to ARR need clear rules on when a deal counts (signed vs live vs paid).

Common mistake

Including non-recurring implementation revenue in ARR to hit round milestones. Sophisticated diligence normalizes it out—and trust drops.

Related ideas

MRR, ACV, net revenue retention, and ARR bridge reporting.