Recurring revenue is the number investors care about most — and the one founders most often calculate wrongly.
10 min read · Level 2
Recurring revenue is what makes a company predictable, and predictability is what makes it plannable and fundable. Which is exactly why the temptation to annualise things that do not recur is so strong — and why doing it is the fastest way to lose credibility in diligence. The smaller true number costs you nothing. The inflated one costs you everything else you said.
MRR is Monthly Recurring Revenue: predictable revenue that repeats every month from subscriptions or contracts.
ARR is MRR × 12 — the annualised run rate.
The word doing the work is recurring. A one-off payment is revenue, but it is not MRR, because next month it is not there.
Because recurring revenue is predictable, and predictability is what makes a company fundable and plannable. $10k of MRR means you start next month at $10k before doing anything; $10k of project revenue means you start at zero.
It is also the number every investor will ask for first, and mis-stating it is a fast way to lose credibility in diligence.
A company's March revenue was $23,000, made up of:
So revenue was $23,000 and MRR is $12,500. ARR is $150,000.
Calling this a '$276k ARR company' — annualising all $23k — is the classic error. It is also the exact thing a diligence process finds, and it damages trust far more than the smaller true number ever would.
The big one is annualising non-recurring revenue, as above. The second is counting a customer who has given notice but has not left yet. The third is including trials that have not converted.
All three inflate the number, all three are found later, and all three make everything else you said look less reliable.
Every customer, every plan, every project.
Ask: will this same amount arrive next month without anyone signing anything new? If no, it is not MRR.
A $6,000 annual plan is $500 of MRR, not $6,000 in the month it was paid.
A customer who has given notice should come out of MRR at the point they leave, and you should know that number is coming.
New MRR, expansion MRR, churned MRR. The composition tells you far more than the headline: $12k that grew from $8k is a different company from $12k that shrank from $16k.
Monthly, and in every investor conversation. Track the movement breakdown once you are past roughly 20 customers.
If you are not a subscription business, do not force it. A marketplace tracks GMV and take rate; an e-commerce business tracks repeat rate and cohort revenue. Reporting a fake MRR because investors expect one is worse than reporting the right metric for your model.
The most common misstatement in early-stage reporting: taking a month that included a large setup fee or a consulting project and multiplying the whole thing by twelve. It is usually not deliberate. It is discovered in diligence, and after that every other number in the deck is checked twice.
Mark each revenue line recurring or not before annualising anything. The discipline is cheap and its absence is expensive.
Flat MRR can mean a stable business or strong new sales exactly cancelled by heavy churn — and those are completely different companies with completely different problems. The breakdown into new, expansion and churned MRR is where the actual information lives.
Report MRR movement, not just the total. Twelve thousand that grew from eight is a different company from twelve thousand that shrank from sixteen.
Create a free account to read the rest and apply it to your own startup.