ARR Growth Rate is the growth in ARR during a specific time period, usually over 12 months. It indicates the velocity of your business's growth and can be very helpful for strategic financial planning. ARR Growth is one of the strongest factors that impact early-stage valuations, so it’s important to monitor when preparing for a raise or to get financing.
Want to know more about ARR growth rate? Then keep reading to get an in-depth understanding of how it can help your business.
What is ARR Growth Rate?
It is the growth in the Average Recurring Revenue (ARR) over a particular time, which reflects the percentage change in the ARR for a company. Usually, the ARR growth rate is calculated for over 12 months.
How to calculate ARR Growth Rate?
The following formula computes the ARR Growth Rate (in percentage) –
For example, the ARR for a company at the beginning and end of the year is $150 and $200 respectively.
The ARR growth rate for that year will be
Why is ARR growth rate important?
According to the reports by Bessemer Venture Partners, their SaaS portfolio companies have an average ARR of $1 to $10 million, with an ARR growth rate of around 160% per year. Of those businesses, the ones belonging to the top and bottom quartiles had 230% and 100% ARR growth rates, respectively.
ARR Growth Rate has a strong correlation with a SaaS company's valuation, especially at its early stage. At the early stages of the companies, there is a correlation of 0.7 between the ARR growth rate and the ARR valuation multiple. Firms in the top tier of ARR growth rates– greater than 230% raised capital at roughly 39 times their ARR. Whereas, companies with the average growth rate– 160% raised funds at 19 times the ARR.
Considering this you can see how ARR growth rate can be used as a key metric to guide strategic financial planning for small businesses looking to fundraise in the future.
What is a good ARR Growth Rate?
There is no such concrete number that is considered a good ARR Growth Rate. We suggest having a high ARR Growth Rate because it indicates progress in the company. However, the average ARR growth rate for SaaS companies having $1 to $10 million ARR is 40%. So this can be used as a benchmark for your company to create a strategic plan for the future.
ARR Growth Rate for strategic financial planning
We understand how tedious it is to conduct strategic financial planning for small businesses. Hence, you can refer to our free templates. We are currently offering a free template to help SaaS organisations benchmark their valuation, ARR growth rate, MRR, ARPU, and other metrics against 200 VC-funded private companies in the Bessemer Venture Partners portfolio. Click here to access the free SaaS metrics valuation benchmarking template.