Decoding the Revenue Puzzle
Transcript
All right, this week we're going to take a break from financial modeling to talk about revenue, that big number on the top of the income statement.
You see, a couple of people emailed me and said, I'm really confused. There's so many different ways to describe revenue. I don't understand. What's the difference between revenue, MRR, annual run rate, contracted recurring revenue, bookings, aren't they all the same?
Well, they're not. And I'm going to make an analogy. You see, as an investor, I view what we do is we go on a journey with the entrepreneur.
And these are all ways of describing our business journey.
So the analogy I'm going to make is I'm going to talk about a train.
A train goes on a journey.
And you see, if I'm sitting on a train and you join me, I could say, oh, this train has
covered 200 miles.
That'd be sort of the equivalent of an entrepreneur who came to me the other day and said, we
raised $100,000 and we've already achieved $50,000 in revenue.
I know how far the entrepreneur has gone, but I don't have any idea of what time.
Imagine, did that train go 200 miles over a day, a week, an hour?
I have no idea.
They're all different results, right?
Now, I can also talk about how fast the train is going.
This train is doing 60 miles an hour.
That's the equivalent of an entrepreneur talking about their monthly recurring revenue or annual recurring revenue.
Those two are the same, just multiplied by 12, right?
So my monthly recurring revenue is $40,000.
That's how quickly I'm generating revenue.
Subtly, there's another term that is thrown around, which is annualized run rate.
Annualized run rate typically means that it's a company that does not have contracted commitments
for customers to keep paying, but they do anyway.
An example of that would be SurePayroll.
When we were running SurePayroll, our customers didn't have long-term contracts.
they could quit at any time but they generally came back because they wanted to pay their employees
every two weeks so we would talk about our annualized run rate as how much how much velocity
we had or how much revenue we were getting at any point now the other thing you hear people talk
about is they talk about their bookings or they'll talk about contracted recurring revenue these are
things generally that are signed by customers but they haven't actually been able to implement yet
it's sort of the equivalent if you got on the train and i said you know this train's going to
to go 90 miles an hour. We could be having that conversation when it's sitting at the station
going zero. You could have zero revenue, but bookings of a million dollars. We could have
that conversation when you're already going 60, 70, 80 miles an hour. You don't know from just
listening to the phrase, what is your contracted recurring revenue or what are your bookings?
So me as an investor, I actually like to know what's been achieved already. So I'll ask a bunch
questions about MRR and ARR. I'll ask how that's changed over time. I'm trying to get a sense for
the direction it's going, right? That will give me a sense for how your company has done and over
what period of time. Of course, bookings are important when you are looking towards the future,
but I'm much more interested in what you've actually already achieved.
So next time you're in a conversation about revenue, make sure that you ask really specific
questions and make sure that the answers to those questions are really specific because it will help
you communicate what's going on in your business. It will help you communicate with your employees,
with your partners, with your investors. It should help you raise money more easily
and should help you run your business better. I hope that's helpful.
Originally published on the MATH Venture Partners blog.