Educational only. Investor benchmarks change quarterly — verify against KeyBanc, OpenView, and SaaS Capital's latest surveys before fundraising.
Every SaaS founder learns the ARR formula in 30 seconds: monthly recurring revenue × 12. The number on the slide is the easy part. The hard part is the four metrics around it that investors actually use to decide whether your ARR is worth 4× or 14×. Plug your numbers into the ARR Calculator as you read.
The actual ARR formula
ARR = Ending MRR × 12. Use contracted, recurring subscription revenue only. Exclude one-time setup fees, professional services, ad-hoc usage, and trials that haven't converted. Annual contracts count at their normalized monthly value, not booked value.
If you have a $24K/year contract signed in March, that's $2,000 of MRR — not $24,000 of ARR added in March. Investors will catch the inflation in due diligence and it kills trust.
Net Revenue Retention (NRR) — the metric that matters more than new sales
NRR = (Starting MRR + Expansion − Contraction − Churn) ÷ Starting MRR. A 100% NRR business has to replace 100% of revenue every year just to stay flat. A 120% NRR business grows 20% per year with zero new logos. That's why investors care about expansion more than top-of-funnel.
- < 100%: Net shrinking. New sales is plugging a leak.
- 100–110%: Acceptable, not VC-grade.
- 110–125%: Healthy. Unlocks 8–12× ARR multiples.
- 125%+: Elite (Snowflake, Datadog territory).
Gross Revenue Retention (GRR) — the truth-teller
GRR strips out expansion: (Starting − Contraction − Churn) ÷ Starting. It can never exceed 100%. Healthy SMB SaaS: 85–92%. Mid-market: 92–96%. Enterprise: 96–99%. If NRR is high but GRR is low, you're masking churn with aggressive upsell — a strategy that breaks once the upsell ceiling hits.
The Rule of 40, in one sentence
Growth % + EBITDA margin % ≥ 40. A 60% grower at −20% margin scores 40 (fundable). A 15% grower at 25% margin also scores 40 (fundable). Below 40, multiples compress fast in any 2026 funding environment.
Common mistakes
- Counting non-recurring revenue in ARR (services, setup).
- Annualizing one big enterprise deal that hasn't started.
- Reporting NRR without GRR — investors always ask for both.
- Excluding logos that downgraded to free — they're still contraction.