Why MRR Is Misleading To Potential Investors

MRR (Monthly Recurring Revenue) is an excellent metric for operators of subscription products. It’s an easy way to keep track of your company’s recurring revenue, especially if you offer several subscription packages.

What it is not, however, is a measure of a company’s value. A concerning trend in the world of indie hackers and bootstrapped founders is to use MRR as the main metric for company valuations.

I see it everywhere: discussions about which MRR multiple is suitable for calculating a startup’s value. Apparently, if you have a recurring revenue of $100/month, you are now expected to list your SaaS for $10,000. Many founders who share their progress publicly (a commendable practice) often post MRR (and only MRR) updates on social media.

The problem with this trend is: it’s at best a small part of the picture, and at worst an outright scam. I have found it very frustrating as someone looking to invest in small startups. Founders tend to flaunt MRR while being deliberately opaque with regard to other crucial metrics.

Through my research on Twitter, I have interacted with at least 20 bootstrapped founders and I follow over 100 who are building new products in public. Here are my takeaways.

Growth is meaningless without context

Consider a country that reports a 20% year-to-year rise in its GDP. This seems fantastic until you begin to question where the growth is coming from.

For example, did the country just take on a trillion in debt?

During the industrial revolution, GDP growth in the most advanced countries was around 1% per year — and it was a sustainable 1%, backed up by solid, resilient economies. This was a time when the world genuinely improved year after year, and not only that — you could count on it not dissolving into chaos the following year (until the black swan event known as Napoleon Bonaparte happened).

But, enough history. What does that have to do with MRR? Well, everything.

The exact same concept applies. Many newly founded companies are no longer aiming at sustainable growth. They’re aiming to have a shiny number at the top so they would be attractive acquisition targets. And, as we will see, it is not that difficult to have revenue growth if you have a halfway decent product. But revenue growth alone does not make your company valuable.

Revenue is meaningless without expenses

I had an MRR of $100 in August, $150 in September, and $225 in October. I’m growing at 50% per month and nothing can stop me! #buildinginpublic

This is what the Twitter profiles of many founders look like. The problem is that, not only can they be stopped, but they almost inevitably will be. Now, if you want to know more about their business (they are building in public, so they should be happy to answer), the first question to ask is the cost of every new customer.

How much are they spending per $1 of additional MRR? Is it $0, $50, or $1,000? These are entirely different prospects, ranging from “potential viral unicorn” to “money pit that will devour its founders”. Chances are, though, that your question will remain unanswered — or, worse yet, answered with demagoguery such as “our growth justifies our expenses”.

Are you building in public or aren’t you?

Customer acquisition is a predictor of sustainability

Even if they respond $0 to the question above, hold your horses.

Organic growth sounds amazing, but let’s scratch the surface. Does the founder have 100k followers on social media? If yes, that’s the most likely explanation for all that “organic growth”.

If they are relying on their personal audience for their company’s growth, that creates two problems:

  1. When they run out of interested followers, the growth will probably grind to a halt. Or maybe it won’t, but we have no way of knowing. They may be able to leverage other mediums, but this is largely uncorrelated with their current MRR growth.
  2. The growth is not transferable to a buyer. If I buy your startup that’s growing rapidly because you’re leveraging your personal brand/connections, how am I supposed to maintain the growth? Since you’re certainly factoring this growth into your exit price, the buyer should be able to continue the same rate of growth by utilizing the same methods as you.

This is why I’m wary of growth numbers posted by influencer founders. The numbers may well be 100% correct and still hold virtually no value for me as a prospective buyer.

Churn is an overlooked key metric

Let’s say your company charges $10/month per customer and you just jumped from $100 MRR to $200 MRR. Sounds great. Quick question though: did you make that jump by gaining 11 new customers and losing 1, or by gaining 20 customers and losing 10?

These are entirely different scenarios and one is a hell of a lot more sustainable than the other. Once again, MRR alone tells us nothing about this crucial measure of value. The two are entirely uncorrelated.

And, naturally, founders hate talking about churn. Let’s not be negative, right?

And let’s not forget about founder input

Companies can grow on sheer willpower and hustle, especially early on.

A founder who is willing to spend every evening cold messaging prospective customers is very likely to see their business grow.

But is the hustle built into the price? And does the prospective buyer of their startup have to sacrifice all of their evenings to keep the growth going? Again, questions of transferability arise.

If I’m buying an SaaS, I’d very much like to know if it’s a full-time job to keep it running.

We can do better

So, if you’re looking to acquire a software-as-a-service startup (or if you’re simply choosing which indie hackers to follow on Twitter) you need to look for real transparency.

I’m not suggesting that founders tweet detailed financial statements like public companies. I am suggesting, however, that all public builders should share at minimum the following:

  1. MRR (with high-level structure).
  2. Expenses (with high-level structure).
  3. The founder(s) hands-on involvement (hours per week).
  4. Customer flux (acquisition and churn).

If you want to achieve transparency while keeping the format easily digestible, you have your formula right here. If you’re building your brand on the premise of building in public, then your users deserve to have a more complete picture of your business than that provided by MRR.

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