With the rise of SaaS models in Latam, Monthly Recurring Revenue (MRR) has emerged as a critical metric when evaluating the performance of a startup with a subscription model. As VCs, we tend to spend quite some time understanding the details of the MRR a company shares with us.
Initially, this may seem counterintuitive because MRR is a straightforward metric—the subscription revenue a company expects to receive on a monthly basis. MRR should reflect the normalized monthly revenue, which is highly predictable, consolidating various pricing plans and billing periods into a single consistent number that is easy to track.
Furthermore, MRR is a "VC-metric"; it is not part of GAAP or IFRS, nor a metric that is reported to any government entity.
MRR is also crucial because VCs tend to multiply this metric by 12 to project the Annual Recurring Revenue (ARR)—this is why we obsess about understanding a company’s MRR in depth and want to ensure that the MRR being reported is predictable and truly recurring.
Fairly simple, right?
Let’s review some of the issues and mistakes we commonly face when reviewing the MRR of a potential investment:
Including annual, semi-annual, or quarterly contract values in a single month—these should be normalized and measured by month.
Including one-time payments, which aren’t recurring by definition.
Including trials or "handshake" closes (this is probably the one I dislike the most), as it overestimates MRR by counting the subscription value before the user is a client with a signed long-term contract.
Not considering discounts (this is probably the one I dislike second most), since MRR should reflect the real value of the subscriptions for the given month.
Additionally, there’s at least one gray area I can identify:
Including delinquent charges—it's hard to know if these amounts will be recovered, especially if you are reporting a few days after the end of the month. As a solution, simply make sure to flag this amount and note recovery from past months.
Having said all of this, presenting your MRR, assuming you don’t fall into any of the issues above, can still be complicated. A common example we encounter in enterprise SaaS business models is a closed client that requires several months of implementation. The company won’t receive a recurring nickel (there could be a one-time set-up fee involved) until the implementation is complete and the solution is up and running. Entrepreneurs fairly argue that they have closed a client (especially if they have a signed contract) and it should be added to their MRR. However, since the client won’t execute or be liable for payment until the implementation is complete and the solution is up and running, it would be premature to include in the MRR.
Let’s review some of the variations of MRR that may be helpful to understand when discussing with both internal and external stakeholders. Ideally, by presenting a handful of these variations, potential investors can have a clear understanding of the MRR of the company, and entrepreneurs can clearly provide all the details they consider relevant.
Live MRR: The MRR that is currently being serviced to clients and generating revenue for the given period.
Booked MRR: Live MRR plus the value of contracts that have been signed and are under implementation, as a result, the client is not yet being serviced the product.
New MRR: The MRR from only new clients for the given month.
Expansion MRR: Additional MRR from the existing base of subscribers, generally as a result of an upsell or renewal at a higher price point.
Reactivation MRR: Monthly revenue reactivated from previously churned or canceled subscriptions.
Churned MRR: Reduction in MRR for the given month as a result of downgrades or cancellations.
Net New MRR: New MRR + Expansion MRR + Reactivation MRR - Churned MRR (this metric provides an overall picture of how MRR is changing).
I hope this is a useful breakdown of MRR. Please feel free to share comments or angles I haven’t covered.
NOTE: While I’ve just "boiled the ocean" on MRR, I wouldn’t expect a startup to provide each of the metrics outlined above; however, I do expect to be provided with the necessary MRR variations that allow me to have a clear understanding of the company’s recurring revenue situation.