Why investors love ARR – The importance of revenue growth

Find out how SaaS companies can focus on the right metrics.

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ARR helps investors estimate the potential return on an investment. It considers an asset’s average annual profit compared to the initial investment cost. Businesses use ARR to make informed decisions about projects and major purchases.

In today’s ever-changing business landscape, investors are on the lookout for opportunities that offer promising returns, and despite a rocky few years, the SaaS industry continues to gain significant attention and investor confidence. SaaS companies rely heavily on their Annual Recurring Revenue (ARR) as a key performance indicator. Down below, we explore why investors love ARR, and how revenue growth impacts SaaS investment and funding decisions.

The rise of SaaS

The software industry has undergone a remarkable transformation over the years. Traditional software models required customers to make substantial upfront investments and bear the costs of installation, maintenance, and upgrades. On the other hand, SaaS offers a subscription-based model, meaning your customers pay a recurring fee for access to software hosted in the cloud. This shift has not only revolutionised the way businesses use software, but also created a myriad of opportunities for investors.

Investor confidence in SaaS

SaaS companies are often favoured by investors because of their subscription-based model, resulting in a predictable and recurring revenue stream. This helps to reduce revenue volatility and increase predictability, which is further reinforced by the concept of ARR.

Understanding ARR

Annual Recurring Revenue (ARR) represents the predictable and annualised revenue your organisation expects to generate from its subscription contracts. It is calculated by multiplying the average monthly recurring revenue (MRR) by 12. ARR is a vital metric for investors as it provides a comprehensive view of a SaaS company’s financial health and growth potential.

Revenue growth as a measure of success

Investors closely monitor revenue growth as a key indicator of a SaaS company’s success. Rapid revenue growth demonstrates market demand, scalability, and the ability to retain and expand the customer base. Investors typically look for a high growth rate, indicating the potential for significant returns on their investment.

  • Attracting new investors: Strong revenue growth makes your SaaS company an attractive prospect for new investors. It signals a healthy business model and potential profitability, encouraging additional funding.
  • Valuation and exit strategies: High revenue growth positively impacts a SaaS company’s valuation, making it more appealing to potential acquirers or for an initial public offering (IPO). Investors seek to capitalise on the increased valuation and potential exit opportunities.
  • Competitive advantage: Revenue growth helps ensure you can gain a competitive advantage by funding product development, marketing efforts, and customer acquisition strategies. Increased revenue enables you to invest in technological advancements, further strengthening your company’s position in the market.
  • Customer retention and expansion: Sustainable revenue growth indicates customer satisfaction and loyalty, as well as the ability to expand existing customer relationships. Investors value companies that can retain and upsell to their customer base, leading to increased revenue and profitability.
  • Long-term sustainability: Consistent revenue growth demonstrates a SaaS company’s ability to adapt to market changes, innovate, and meet evolving customer needs. Investors prefer companies that can generate long-term sustainable growth, minimising the risk associated with their investments.
Learn more about other key metrics in this handy guide to SaaS metrics and this series on SaaS benchmarks.
 

Attracting new investors

The importance of revenue growth cannot be overstated when it comes time for you to attract investors and secure funding within SaaS. ARR serves as a powerful metric for evaluating a SaaS company’s financial health, growth potential, and market competitiveness. Investors are drawn to the predictability and stability of subscription-based revenue models, enabling them to make informed investment decisions.

As the SaaS industry continues to develop, companies that demonstrate strong revenue growth and a solid ARR foundation are poised for success. Investors recognise the value of sustainable revenue growth as a measure of a SaaS company’s ability to drive profitability, expand its customer base, and deliver long-term shareholder value.

Find out more about how ARR is used in valuation in this benchmarking article; read more about benchmarking revenue growth in this article.

Using ScaleXP for ARR tracking

If you would like to track your ARR in real-time and fully automate MRR, ARR and over 40 other SaaS metrics, you should consider giving ScaleXP a try.

We’re the leading SaaS finance tool and integrate with all major accounting software platforms and CRM systems to give you one source of truth. As data is imported, a series of smart algorithms prepare a revenue recognition schedule and a full ARR schedule, broken down by customer. Want to learn more? Book your free demo here, and we’ll run through the platform and how it can help you.

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