ARR, run rate, and other revenue words

“Startup hits $100M run rate” is a frequent headline in 2026. It sounds like the company makes $100M a year. It does not say that. A run rate is one short period of revenue, multiplied to fill a year. In the next 12 months, the company can collect much more or much less than $100M.

Investors use a small set of revenue words to compare companies. The lesson Decode a startup headline gave a first look at them. Each word measures a different thing, and founders frequently stretch the words to get a bigger number. This lesson teaches each word with one example. Then you can read a headline correctly and write an honest one.

Predict first

A startup announces a $100M run rate. Approximately how much revenue did it make last month?

Type a guess before you continue. A guess first, even a wrong one, makes the answer easier to remember.

Your guessSave my guess

Revenue is earned, not collected

Revenue is money that you earned when you delivered what the customer paid for. Revenue is not the same as the cash in your bank account. In the US, the accounting rules (GAAP, with the standard ASC 606) tell a company when it can count revenue.

Here is an example. In January, a customer prepays $1,200 for one year of software. You get $1,200 of cash on that day. But you earn only $100 each month, as you supply the service. January revenue is $100. The other $1,100 is deferred revenue: service that you owe to the customer. Accountants record it as a liability.

From a signature to revenue

One customer contract gives five different numbers on five different dates. Here is a 3-year contract at $120K a year. The customer signs on December 15. The service starts on January 1. The customer pays each annual invoice before the service year starts.

Number	What it measures	Amount	Date
Bookings (TCV)	The value of the signed contract	$360K	December 15
ARR	One year of a live contract	$120K	January 1
Billings	The invoice that you send	$120K	January 1
Cash	The money that arrives	$120K	January 20
Revenue	The service that you supplied	$10K a month	Each month

Bookings are signed contracts. A booking is not revenue at the time of signature, because you did not supply the service yet. The TCV (total contract value) is the value of all the years of the contract. The ACV (annual contract value) is the value of one year. Billings are the invoices that you send.

At the end of Q1, the company supplied three months of service, so Q1 revenue is $30K. It still owes nine months of service, so deferred revenue is $90K. a16z gives a formula that connects the numbers:

Billings = Revenue + Change in
                     deferred revenue
$120K    = $30K    + ($90K − $0)

A letter of intent (LOI) is not in the table. An LOI says that a customer plans to buy, but nothing in it makes the customer pay. a16z writes that LOIs and verbal agreements are not bookings and not revenue.

MRR and ARR count only revenue that recurs

MRR (monthly recurring revenue) is the revenue that you will get again next month, because customers have a subscription or a contract that renews. MRR does not include one-time fees, such as fees for setup, consulting, or hardware.

ARR (annual recurring revenue) is the yearly value of the recurring contracts that are active today. Usually, ARR = MRR × 12:

MRR = 200 customers × $250 = $50K
ARR = $50K × 12            = $600K

In the same month, the company also charges one setup fee of $8K. The setup fee is revenue, but it is not MRR and it is not ARR.

ARR is not a GAAP number, and no auditor approves it. Thus each company can stretch the definition. In 2015, a16z wrote that ARR means “annual recurring revenue, NOT annual run rate.” It added that ARR “should exclude one-time fees, professional service fees, and any variable usage fees.”

A run rate multiplies one period to a year

A run rate multiplies the revenue of a short period to fill one year. It includes all revenue, recurring or not. Nothing makes sure that the revenue continues.

Run rate = Revenue of a day     × 365
         = Revenue of a week    × 52
         = Revenue of a month   × 12
         = Revenue of a quarter × 4

When the period is shorter, it is easier to select an unusually good one. Here is an AI tool that customers pay for by usage. In four weeks, it earned $150K, $160K, $170K, and $300K. The last week had a spike from a product launch.

Month:        $780K × 12 = $9.36M
Average week: $195K × 52 = $10.14M
Launch week:  $300K × 52 = $15.6M

The three numbers come from the same four weeks. The launch week gives a number 67% higher than the month. The average week gives more than the month, because one month has approximately 4.33 weeks (52 ÷ 12), not 4. Only the part of the revenue that comes from recurring contracts can be ARR.

Use the calculator below. First, enter one period of revenue and read its run rate. Then do the stress test. A launch spike is one-time revenue. Churn is the part of the recurring revenue that leaves each month. Find the settings at which the company collects only half of its headline.

Calculator

Decode a run rate, then stress-test it

Enter the revenue of one period. See the run rate, then see what the company collects in the next 12 months.

One period of revenue is a

DayWeekMonthQuarter

Revenue in that month

Run rate

$6M

$500K × 12

Per month

$500K

Per week

$115.38K

Per day

$16.44K

Stress test: the next 12 months

A run rate assumes that the period repeats for a full year. Remove the one-time revenue and add churn.

One-time part of this month

20%

Setup fees, consulting, or a launch spike that does not occur again.

Change in recurring revenue each month

−3%

Less than zero: customers leave (churn). More than zero: growth.

ARR, recurring only

$4.8M

Collected in 12 months

$3.96M

Collected ÷ run rate

66%

Revenue each month for the next 12 months

• Headline: run rate ÷ 12
• Revenue the company collects

20% of this month was one-time revenue, so only $4.8M of the $6M run rate is ARR. With 3% churn each month, the company collects $3.96M in the next 12 months: 66% of the headline.

A run rate shows speed at one moment. It does not show the money that the company will collect.

TTM revenue looks back

TTM revenue (trailing twelve months revenue) is the sum of the revenue of the last 12 months. It looks back in time. Thus nobody can make it larger with one good week. For a company that grows fast, TTM revenue is much lower than ARR, because the first months were small.

Worked example · step 1 of 5

ARR against TTM revenue for a company that grows 10% a month

1. 1

   Set up the company

   MRR is $100K in month 1. It grows 10% each month for 12 months.

Show step 2Show all steps

Work it out

A company has $40K of subscription revenue each month. This month, it also earned $20K from a one-time setup project. What is its ARR?

Your answerCheck

Work it out

A startup says that it has a $30M run rate. It multiplied one week of revenue. How much revenue did it make in that week?

Your answerCheck

GMV is not revenue

GMV (gross merchandise value) is all the money that customers spend through a marketplace. Most of that money goes to the sellers. The revenue of the marketplace is only its cut, the take rate:

Revenue = GMV × Take rate
        = $100K × 20%
        = $20K

The revenue ladder

On April 25, 2026, Garry Tan, the CEO of Y Combinator, published “YC’s official advice” about revenue words. He put revenue claims in order, from the least impressive to the most impressive. He told founders not to give one rung of the ladder as a different rung. The ladder has five rungs:

1. LOI. Tan’s example: “We have $100K in non-binding LOIs.”
2. GMV. Tan tells founders not to call GMV “revenue”.
3. cARR or bookings: signed contracts. Pilots, opt-out clauses, and “starts billing after deployment” make these contracts weaker.
4. Run rate. Tan’s example: “We make about $600K in annual revenue run rate.” He adds that this metric “is never abbreviated to ARR.”
5. MRR or ARR: “Revenue actually invoiced and paid on a regular basis, per contract renewed monthly or yearly.”

On rung 3, CARR (contracted ARR) is ARR plus contracts that customers signed but that are not live yet. Put the claims below on the ladder. Each answer shows an honest way to say the claim.

Sort the claims · claim 1 of 8

Put each claim on its rung of the revenue ladder

The ladder goes from the strongest claim at the top to the weakest at the bottom. Select the rung for each claim.

Claim 1

120 customers pay $500 a month for subscriptions that renew each year. The company invoices them, and they pay.

1. 5MRR or ARRInvoiced, paid, and renews under a contract.
2. 4Run rateRecent revenue × 12 (or × 52, or × 365). It can include revenue that does not occur again.
3. 3cARR or bookingsSigned contracts that do not bill yet, or that the customer can leave.
4. 2GMVMoney that goes through the company. Only its cut is revenue.
5. 1LOIA plan to buy. Nobody must pay.

The 2025–2026 debate about “ARR”

In 2025 and 2026, many AI startups announced very fast revenue growth, frequently as “ARR”. Investors and journalists started to question the numbers. The problems that they found have names:

• CARR given as ARR. One VC told TechCrunch in May 2026 that at some companies, CARR was 70% more than ARR. Bessemer tells companies to adjust CARR for the churn and downsell that they expect.
• Pilots given as ARR. In September 2025, Fortune reported a founder who gave $325K of ARR from “a two-week pilot.” In May 2026, TechCrunch reported a startup that counted a “yearlong free pilot” as ARR.
• Contracts that customers can leave. Kyle Poyar wrote in December 2025 that some AI contracts let customers cancel after three months. Of those customers, “70–80%” cancel.
• Ramped contracts. A 3-year contract at $1M, $2M, and $3M a year is $1M of ARR today, not $3M. Mostly Metrics gave the honest version in May 2026: “We have $3M in cARR from customers X, Y, and Z, of which $1M is currently being collected.”

Is a run rate always a bad number?

No. A run rate is the correct word for revenue that does not come from recurring contracts, such as usage or transactions. YC puts it one rung below ARR, not at the bottom. The error is to call a run rate “ARR”, or to annualize an unusual period without a statement of the period. For a company that grows, a run rate from a normal recent month can even be lower than the revenue of the next 12 months.

Quiz · question 1 of 6

Test what you learned

A founder says, "We are at a $60M run rate." Approximately how much revenue did the company make last month?

• A$164K
• B$1.15M
• C$60M
• D$5M