Startup Key Performance Indicators — ARR and ARR Growth

This article is intended to be part of an ongoing series that unpacks KPIs that matter for early-stage startups. For the introductory post, The Hierarchy of Key Performance Indicators, please click here.

As discussed in the introductory post of this series, The Hierarchy of Key Performance Indicators, a startup’s KPIs should fall into three main categories:

1. Entity metrics
2. Business unit metrics
3. Activity level metrics

Let’s dive in and unpack two of the most common entity metrics in venture-backed startups — ARR and ARR growth.

First — what is ARR? ARR is the acronym for annual recurring revenue and is typically utilized by founders and investors of SaaS startups. The word “recurring” is key in this metric as it typically signals a subscription revenue model with paying customers continuing to use the product until they cancel their subscription (i.e., churn). Conversely, businesses that have one-time or non-recurring sales would not use an ARR metric, but rather a monthly sales/revenue metric.

The simplest way to calculate ARR:

Current monthly recurring revenue (MRR) * 12 months = ARR

To further illustrate the KPI hierarchy concept from the introductory post of this series and how entity metrics are based on business unit and activity level metrics, ARR and MRR are entity metrics, but are built upon business unit metrics — for example:

Average monthly revenue per user/unit (ARPU) * number of current users/units = MRR

Back to ARR milestones and ARR growth metrics — these are likely the most common KPIs used by founders and investors to gauge the performance of an early-stage startup.

The venture capital ecosystem typically has a few benchmarks that help determine the current stage and future trajectory of a startup.

The first pillar is typically around the current startup stage of the company. The key metric here is ARR and the benchmarks investors typically use are:

1. Pre-Series A = <$1m ARR; product-market-fit is being established
2. Series A = >$1m ARR; product-market-fit has been established
3. Series B = >$8m ARR; increase growth and scale via repeatable customer acquisition

Once you hit Series A, speed and velocity really come into play, because this is the time period where startups are “crossing the startup chasm” (a nod to Geoffrey Moore’s book “Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers”). The probability of a startup’s “survival” increases significantly if a company raises a Series B round.

Series B rounds historically are benchmarked for software startups at $8–10m ARR, however this number has come down in recent years because of an incredibly large amount of investment capital in the private markets. If public market returns decrease (i.e., this bull market begins to slow with increasing interest rates from the Federal Reserve to combat inflation), the amount of dollars being allocated by investors to illiquid investment vehicles may decrease — a topic for another post.

Assuming that, the ARR milestones within Series A are:

1. $1m-$2m (ideal ARR needed to raise a Series A)
2. $2m-$4m
3. $8m-$10m (ideal ARR needed to raise a Series B)

The goal of a startup should be to achieve $8m-$10m ARR (i.e., Series B) within 24 months of their Series A fundraise without the need for bridge funding. This is why ARR growth should be closely monitored by startup founders as it is one of the main metrics that investors assess when assessing a startup’s fundraise. Bridge funding is a topic that deserves its own post, but in short, it increases founder dilution and is typically required when the startup has lower than expected growth in revenue and other key entity level metrics.

ARR growth benchmarks can be broken into 2 categories:

1. Year-over-year growth (YoY)

>80% is good

>100% is great

>200% is outstanding

2. Month-over-month growth (MoM)

>10% is good

>15% is great

>20% outstanding

These two ARR growth categories and corresponding benchmarks work in tandem as they negate the effects of easy comparable or “easy comp” periods and unpredictable growth — both are needed to assess the performance of the business.

Milestones and benchmarks for ARR and ARR growth are not hardened rules — they are merely guidelines meant to be flexible based on the startup and their stakeholders. The main goal for startups is to assess their performance against their forecasts and course correct if needed. Startups that continuously achieve or outperform forecasts typically have robust and healthy underlying business unit and activity level KPI metrics, which in turn will increase interest from new customers and investors alike.