ARR is usually calculated from the most recent month's recurring revenue: a company doing $100K in subscription revenue in March is running at roughly $1.2M ARR. Investors lean on ARR because it strips out one-time noise — a big setup fee or a one-off consulting project shouldn't count, because it won't repeat next year. When a founder quotes ARR, it's worth asking what's actually recurring underneath the number.
ARR matters most as a growth signal and a valuation anchor. A seed company growing from $500K to $2M ARR in a year is telling a very different story than one stuck at $500K, even if both are the same size today. Early-stage software is often valued as a multiple of ARR, so a company at $2M ARR valued at a 10x multiple implies a $20M valuation. Watch the growth rate and net revenue retention alongside the headline number — ARR that grows only because the company keeps spending more to acquire each new customer is far less valuable than ARR that compounds from existing customers expanding.