Not long ago, the standard announcement from a fast-growing
technology company tended to involve a funding round, an
impressive valuation and a photograph of the founders looking as though
raising $100 million was roughly what they had expected to happen that Tuesday.
The amount raised often did most of the work. A large cheque from a respected
investor carried its own implication that things inside the company must be
going rather well. The language is changing.
Starling has been talking publicly about the annual
recurring revenue generated by Engine, its banking technology business. Carta
has published its ARR milestones. Similar figures increasingly appear in
investor updates, founder interviews and company announcements across financial
technology, and we have been discussing whether to publish a run rate number
ourselves.
I understand the attraction because the market has become
much more interested in what happens after the money arrives. Between about
2020 and 2022, fintech became remarkably good at producing spectacular
private valuations.
Capital was cheap, investors were chasing growth, and a
funding round could create the impression of commercial momentum before the
company had generated very much revenue at all. Some excellent businesses were
financed that way; some less excellent ones benefited, too. Venture capital,
like most forms of human enthusiasm, occasionally gets carried away.
The correction that followed changed the questions.
Investors looking at growth stage fintechs now spend much more time on margins,
customer concentration, cash generation and the durability of revenue.
Companies still raise money, and valuations still matter, but a funding
announcement has lost some of its former ability to serve as a general
certificate of corporate health.
Hence ARR.
A revenue figure appears reassuringly tangible. Customers
have bought something, money is moving through the business, and an outsider has
at least one number against which to judge all the talk of growth. For private
companies whose statutory accounts inevitably describe a business several
months behind where it is today, a sensible run rate figure can be genuinely
informative. The difficulty begins with the word “sensible”.
One Acronym, Different Businesses
ARR originally had a fairly obvious home in subscription
software, where a company might have thousands of customers paying contracted
annual fees. Fintech has borrowed the acronym for businesses whose economics
can look completely different.
A banking software platform with three-year customer
contracts has one kind of recurring revenue. A payments company earning a small
amount whenever somebody uses its infrastructure has another. A trading
business may generate extremely repeatable customer activity while remaining
sensitive to volatility and market conditions.
Lending brings credit cycles and
balance sheet considerations into the equation. Two founders can therefore
announce identical ARR figures while describing businesses with very different
levels of predictability.
AI has recently made the terminology even more entertaining.
The extraordinary speed at which some AI companies have reported revenue growth
has encouraged closer examination of what exactly sits inside those numbers.
Investors have debated the treatment of contracted revenue, customers that have
signed but have yet to go live, unusually strong recent months and annualised
figures based on very short trading periods.
None of those calculations is inherently absurd. They simply
answer different questions. If a company earns £1 million in January and calls
itself a £12 million annualised run rate business, the arithmetic is beyond
reproach. Whether January will repeat itself another eleven times is the more
interesting question.
What the Number Needs to Tell Us
For fintech, that distinction matters enormously because
transaction volumes can move, customers can ramp at different speeds, and market
activity can make one quarter look rather more handsome than the next. A
headline figure becomes useful only when readers can understand the machinery
producing it.
That is the standard I would apply if we publish one
ourselves. I would want people to know the period being annualised, how much
revenue is live today, how much has been contractually committed, whether a
handful of customers account for a large share of it and how the economics
change as volumes grow.
A smaller figure with a clear explanation tells me
considerably more about a business than a giant number that develops
complications the moment somebody opens Excel.
Fintech Grows up
The interest in ARR also says something about where fintech
now sits in the wider technology market. AI has taken over much of the role
fintech occupied during the last investment cycle.
It attracts astonishing
amounts of capital, produces founders who become famous remarkably quickly and
generates revenue milestones at a speed that has caused an entire venture
industry to reach repeatedly for its calculator.
Fintech, meanwhile, is growing up. That sounds less
glamorous than being the next technological revolution, although there are
worse commercial positions to occupy.
Many fintech businesses now have
regulated operations, institutional customers, established payment flows,
banking relationships and years of operating data. The sector can increasingly
make its case through what customers actually use and pay for.
ARR fits that stage of development rather well. It also
comes with a danger familiar to anyone who lived through the valuation boom.
Once a number becomes associated with success, companies inevitably become
inventive about making the number larger.
The Risk of Another Vanity Metric
A decade ago, valuation sometimes told us more about the
availability of capital than the quality of the company receiving it. ARR could
acquire the same weakness if every form of projected, committed, annualised, and
repeatable revenue ends up placed beneath one convenient acronym.
That would be a shame because the underlying change is
healthy. Fintech should be able to show that businesses are generating
substantial revenue, that customers stay with them, and that years of investment
have produced companies with genuine commercial weight.
Publishing those
figures gives the market more information and gives management teams something
more demanding to talk about than the valuation attached to their last funding
round.
But if ARR is going to become fintech’s new favourite
number, the industry should spend a little less time admiring the acronym and a
little more time explaining the arithmetic.
Not long ago, the standard announcement from a fast-growing
technology company tended to involve a funding round, an
impressive valuation and a photograph of the founders looking as though
raising $100 million was roughly what they had expected to happen that Tuesday.
The amount raised often did most of the work. A large cheque from a respected
investor carried its own implication that things inside the company must be
going rather well. The language is changing.
Starling has been talking publicly about the annual
recurring revenue generated by Engine, its banking technology business. Carta
has published its ARR milestones. Similar figures increasingly appear in
investor updates, founder interviews and company announcements across financial
technology, and we have been discussing whether to publish a run rate number
ourselves.
I understand the attraction because the market has become
much more interested in what happens after the money arrives. Between about
2020 and 2022, fintech became remarkably good at producing spectacular
private valuations.
Capital was cheap, investors were chasing growth, and a
funding round could create the impression of commercial momentum before the
company had generated very much revenue at all. Some excellent businesses were
financed that way; some less excellent ones benefited, too. Venture capital,
like most forms of human enthusiasm, occasionally gets carried away.
The correction that followed changed the questions.
Investors looking at growth stage fintechs now spend much more time on margins,
customer concentration, cash generation and the durability of revenue.
Companies still raise money, and valuations still matter, but a funding
announcement has lost some of its former ability to serve as a general
certificate of corporate health.
Hence ARR.
A revenue figure appears reassuringly tangible. Customers
have bought something, money is moving through the business, and an outsider has
at least one number against which to judge all the talk of growth. For private
companies whose statutory accounts inevitably describe a business several
months behind where it is today, a sensible run rate figure can be genuinely
informative. The difficulty begins with the word “sensible”.
One Acronym, Different Businesses
ARR originally had a fairly obvious home in subscription
software, where a company might have thousands of customers paying contracted
annual fees. Fintech has borrowed the acronym for businesses whose economics
can look completely different.
A banking software platform with three-year customer
contracts has one kind of recurring revenue. A payments company earning a small
amount whenever somebody uses its infrastructure has another. A trading
business may generate extremely repeatable customer activity while remaining
sensitive to volatility and market conditions.
Lending brings credit cycles and
balance sheet considerations into the equation. Two founders can therefore
announce identical ARR figures while describing businesses with very different
levels of predictability.
AI has recently made the terminology even more entertaining.
The extraordinary speed at which some AI companies have reported revenue growth
has encouraged closer examination of what exactly sits inside those numbers.
Investors have debated the treatment of contracted revenue, customers that have
signed but have yet to go live, unusually strong recent months and annualised
figures based on very short trading periods.
None of those calculations is inherently absurd. They simply
answer different questions. If a company earns £1 million in January and calls
itself a £12 million annualised run rate business, the arithmetic is beyond
reproach. Whether January will repeat itself another eleven times is the more
interesting question.
What the Number Needs to Tell Us
For fintech, that distinction matters enormously because
transaction volumes can move, customers can ramp at different speeds, and market
activity can make one quarter look rather more handsome than the next. A
headline figure becomes useful only when readers can understand the machinery
producing it.
That is the standard I would apply if we publish one
ourselves. I would want people to know the period being annualised, how much
revenue is live today, how much has been contractually committed, whether a
handful of customers account for a large share of it and how the economics
change as volumes grow.
A smaller figure with a clear explanation tells me
considerably more about a business than a giant number that develops
complications the moment somebody opens Excel.
Fintech Grows up
The interest in ARR also says something about where fintech
now sits in the wider technology market. AI has taken over much of the role
fintech occupied during the last investment cycle.
It attracts astonishing
amounts of capital, produces founders who become famous remarkably quickly and
generates revenue milestones at a speed that has caused an entire venture
industry to reach repeatedly for its calculator.
Fintech, meanwhile, is growing up. That sounds less
glamorous than being the next technological revolution, although there are
worse commercial positions to occupy.
Many fintech businesses now have
regulated operations, institutional customers, established payment flows,
banking relationships and years of operating data. The sector can increasingly
make its case through what customers actually use and pay for.
ARR fits that stage of development rather well. It also
comes with a danger familiar to anyone who lived through the valuation boom.
Once a number becomes associated with success, companies inevitably become
inventive about making the number larger.
The Risk of Another Vanity Metric
A decade ago, valuation sometimes told us more about the
availability of capital than the quality of the company receiving it. ARR could
acquire the same weakness if every form of projected, committed, annualised, and
repeatable revenue ends up placed beneath one convenient acronym.
That would be a shame because the underlying change is
healthy. Fintech should be able to show that businesses are generating
substantial revenue, that customers stay with them, and that years of investment
have produced companies with genuine commercial weight.
Publishing those
figures gives the market more information and gives management teams something
more demanding to talk about than the valuation attached to their last funding
round.
But if ARR is going to become fintech’s new favourite
number, the industry should spend a little less time admiring the acronym and a
little more time explaining the arithmetic.
