Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date! ARR (Annual Recurring Revenue) vs ERR (Experimental Recurring Revenue) ARR (Annual Recurring Revenue) is one of the most popular SaaS (Non-GAAP) metrics. However, it’s also one of the most loosely used metrics, and is frequently misused. In it's truest form, ARR is used by pure SaaS business models to describe the aggregate annual value of the entire customer set. Customers sign contracts with annual increments (one, two, three, etc year deals), and the spend is predictable across the course of the contract. At contract expiration these customers either renew (sign another contract with same annual value), expand (sign another contract with higher annual value), contract (sign another contract with lower annual value), or churn (stop being a customer and spend goes to zero).
This was great. I heard Brad mention ERR on the pod and this was a great primer into the idea of these experimental revenues. My question is; When valuing an ERR generating business as opposed to an ARR generating business, how are you guys determining what discount to apply to the revenue multiple valuation? Or are you forgoing the revenue multiple valuation completely?
Along the lines of your ERR POV, I believe that companies charging for co-pilots e.g. MSFT, CRWD, ADBE...will have to give it away for free as part of their base package. Copilots will not be accretive to topline revenue or ARR in the long run...they will become ERR table stakes. cheers!
Great article. It might be worthwhile to evaluate the cost side / assumptions. IMHO there is little time spent to evaluate how much a company will need to be able to deliver the ARR, sticky SAAS IP driven business vs one where you need to replace HW & SW not even thinking about the impact of GenAI on SW development. Maybe a suggestion as there is a lot to be found how to look at ARR and little how to think or classify those companies from a profit projection. Maybe worthwhile to compliment this excellent top line driven article.
Great read this week! Are there historical parallels for cloud etc that can help inform how to value ERR?
Excellent explainer and post!
This was great. I heard Brad mention ERR on the pod and this was a great primer into the idea of these experimental revenues. My question is; When valuing an ERR generating business as opposed to an ARR generating business, how are you guys determining what discount to apply to the revenue multiple valuation? Or are you forgoing the revenue multiple valuation completely?
My best read of the morning! Thanks @Jamin.
Along the lines of your ERR POV, I believe that companies charging for co-pilots e.g. MSFT, CRWD, ADBE...will have to give it away for free as part of their base package. Copilots will not be accretive to topline revenue or ARR in the long run...they will become ERR table stakes. cheers!
Great article. It might be worthwhile to evaluate the cost side / assumptions. IMHO there is little time spent to evaluate how much a company will need to be able to deliver the ARR, sticky SAAS IP driven business vs one where you need to replace HW & SW not even thinking about the impact of GenAI on SW development. Maybe a suggestion as there is a lot to be found how to look at ARR and little how to think or classify those companies from a profit projection. Maybe worthwhile to compliment this excellent top line driven article.