👋 Hi, it’s CJ Gustafson and welcome to Mostly Metrics, my weekly newsletter where I unpack how the world’s best CFOs and business experts use metrics to make better decisions.
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I interviewed Tony Kim, head of tech investments at BlackRock, for the pod this week (links below!) and the topic of ARR came up.
Well, came up would be an understatement. It kind of blew up…
“I was deceived! We were all deceived! What is ARR? ARR is quarterly revenue times four…
ARR is you are doing my math for me.
You are juicing your number.”
He elaborated…
“You have $25M or quarterly revenue, now the ARR is $100M, the companies look a lot bigger!”
And then he brought up the 800 pound gorilla in the room…
And definitions?… you could take the difference on a daily basis from January 1st to March 31st and multiply by 365…. You could take the “exiting ARR”… There are lots of ways to skin the cat. And it’s basically a reflection of let’s just inflate the number to make ourselves look bigger.
You notice that public software companies trade on GAAP revenue. But for private companies it’s multiples of ARR. But somehow that whole thing has to translate into GAAP revenue when you go public. When you are private, they just take the best possible approximation and juice it.
I look at that and say, “Guys, come on, it’s nonsensical!”
A man after my own heart. I always like to say - “If you want to trick your investors, tell them about your CARR.”
Regardless of whatever you think about ARR, it’s important to know how the top companies are defining it. And it’s your responsibility to to know if you look better or worse compared to your peers.
Don’t hate the player, hate the game definition of ARR.
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