cloudedjudgement.substack.com · 2024-03-22 · 804d

Clouded Judgement: ERR vs ARR and the Conundrum of AI Revenue Streams

The article distinguishes between ARR (Annual Recurring Revenue) and ERR (Experimental Runrate Revenue), arguing that much AI revenue today is experimental rather than truly recurring, which undermines traditional SaaS valuation multiples that depend on retention stability. The author warns founders and investors that misclassifying ERR as ARR leads to flawed financial planning and overvalued businesses, as AI buyers are currently experimenting with both functionality and vendors, leading to high churn risk once production deployment occurs.

34 metrics· Cited 0× in the knowledge base ·Open source ↗

Metrics in this report

EV / NTM Revenue Multiple - High Growth (>27%)

10.9multiple

median

High-growth SaaS companies

EV / NTM Revenue Multiple - Low Growth (<15%)

4.5multiple

median

Low-growth SaaS companies

EV / NTM Revenue Multiple - Mid Growth (15-27%)

9.6multiple

median

Mid-growth SaaS companies

EV / NTM Revenue Multiple - Overall Median

6.3multiple

median

Public SaaS companies (as of March 2024)

Gross Revenue Retention (Enterprise SaaS)

90-95percent

target

Enterprise software businesses targeting stable ARR

Gross Revenue Retention (GRR) - Enterprise

90-95percent

target

Enterprise SaaS software businesses

Gross Revenue Retention (GRR) - SMB

80-85percent

target

SMB SaaS software businesses

Gross Revenue Retention (SMB SaaS)

80-85percent

median

SMB-focused SaaS businesses

High Growth SaaS Median EV/NTM Revenue Multiple

10.9x

median

SaaS companies with >27% projected NTM growth

Low Growth SaaS Median EV/NTM Revenue Multiple

4.5x

median

SaaS companies with <15% projected NTM growth

Median CAC Payback

38months

median

Public SaaS companies at scale (cohort analysis)

Median CAC Payback - SaaS

38months

median

Public SaaS companies

Median FCF Margin

10percent

median

Public SaaS companies at scale (cohort analysis)

Median FCF Margin - SaaS

10percent

median

Public SaaS companies

Median G&A % Revenue

16percent

median

Public SaaS companies at scale (cohort analysis)

Median G&A % of Revenue

16percent

median

Public SaaS companies

Median Gross Margin

75percent

median

Public SaaS companies at scale (cohort analysis)

Median Gross Margin - SaaS

75percent

median

Public SaaS companies

Median LTM Revenue Growth

17percent

median

Public SaaS companies

Median NTM Revenue Growth

13percent

median

Public SaaS companies

Median Net Retention Rate

110percent

median

Public SaaS companies at scale (cohort analysis)

Median Net Revenue Retention - SaaS

110percent

median

Public SaaS companies

Median Operating Margin

-12percent

median

Public SaaS companies at scale (cohort analysis)

Median Operating Margin - SaaS

-12percent

median

Public SaaS companies

Median R&D % Revenue

25percent

median

Public SaaS companies at scale (cohort analysis)

Median R&D % of Revenue

25percent

median

Public SaaS companies

Median S&M % Revenue

42percent

median

Public SaaS companies at scale (cohort analysis)

Median S&M % of Revenue

42percent

median

Public SaaS companies

Mid Growth SaaS Median EV/NTM Revenue Multiple

9.6x

median

SaaS companies with 15-27% projected NTM growth

Net Revenue Retention (Enterprise SaaS)

120+percent

target

Enterprise software businesses with expansion revenue

Net Revenue Retention (NRR) - Enterprise

120+percent

target

Enterprise SaaS software businesses

Net Revenue Retention (NRR) - SMB

105percent

target

SMB SaaS software businesses

Net Revenue Retention (SMB SaaS)

105percent

median

SMB-focused SaaS businesses

Overall SaaS Median EV/NTM Revenue Multiple

6.3x

median

Entire public SaaS cohort (cohort analysis)