“$800k ARR…is that contracted or live?” Most investors never ask this question. They’re making a big mistake.

Whether you’re an investor or a founder, you have to understand the difference between contracted and live revenue.

Tl,dr: Contracted ARR is signed revenue, live ARR is actual money you’re billing. Focus on live ARR.

Let’s break down the differences and how big gaps can creep up on you…

Contracted Revenue

This is the total value of all the contracts with customers you’ve signed. You may see this written as “cARR” for short.

Let’s say that you signed an $800k ARR contract with Megacorp. They’re your only customer. That means your contracted revenue is $800k ARR.

Sounds awesome right? Not so fast…

Let’s say that Megacorp manufactures bobbleheads of top VCs. They have 8 plants where they plan to take your product live.

But right now, you’re only live in their Pittsburgh plant. You’ll go live at the other 7 over the next year.

The contract states they’re only billed for plants that are live. This is typical in SaaS contracts, although there is the rare contract that lets you bill the customer immediately even if they haven’t rolled out your product.

Live Revenue

Here’s where we get down to real money…

You’re charging them $100k per plant. So right now, with just the Pittsburgh plant live on your product, you’re only getting $100k a year coming into your bank account.

That means your live revenue is $100k ARR. Each month, Megacorp sends you a check for $8,333.33. I’m assuming you actually remembered to bill them (a surprising number of startups don’t), the contract stipulates monthly payments, and you’re past their likely net-30 payment terms.

When will you get the remaining $700k/yr coming into your bank account? Well, the deployment schedule says that the other 7 sites will go live over the next 12 months.

The Dangers of Relying on Contracted Revenue

You’re expecting to see that remaining $700k soon. But what if Megacorp decides to delay the project?

That $700k you were counting as “revenue” suddenly isn’t coming any time soon.

Maybe they cancel the other sites entirely, and you only ever get the Pittsburgh plant. That would mean the $700k evaporates for good.

If you were hiring thinking you had $800k in revenue, you’ve overhired. You have people sitting around doing nothing and you can’t afford to pay them.

You also told your investors that you’re at $800k in revenue. Now, they find out that number is a little squishy…

They should’ve asked what your live revenue is. If they didn’t, that’s on them.

But there’s no guarantee they’ll see it that way. The investors could blame you for not being clear.

Where Contracted vs. Live Revenue Disparities Are Worst

Not all startups have big contracted vs. live disparities. But in certain industries, they’re everywhere.

If there’s one type of company particularly prone to huge disparities between contracted and live revenue, it’s healthcare companies.

Healthcare moves slow. Really slow.

They sign a contract today. But the rollout takes an eternity.

Don’t I know it! I used to roll out medical software products for hospitals all over America. Those projects took years!

So if you’re a healthcare investor or founder, you have to pay particularly close attention to the contracted vs. live distinction.

Enterprise SaaS startups in general tend to have big differences between contracted and live revenue. Again, it’s those long deployment periods.

Consumer/SMB SaaS companies don’t see this problem as much. Their customers usually just plunk down their credit card and start using the product.

Avoiding the Mess

If you’re an investor, always ask what live revenue is. Explain exactly what you mean: “How much cash is actually hitting your bank account now?”

If you’re a founder, always tell investors what your contracted and live revenue is. Be extremely clear which is which.

Meanwhile, don’t hire and expand based on some pie-in-the-sky contracted revenue number. You may never get that money!

Hire, expand, and spend based on what you can actually afford now. If you cannot pay those folks with your live revenue and cash in bank today, you don’t want to hire them.

Wrap-Up

Bottom line: focus on live revenue.

Part of not being a schmuck as an investor is knowing these little nuances with big implications. The same goes for founders.

I didn’t know any of this stuff when I started investing 4 years ago. But bit by bit, you start to learn the pitfalls and how to avoid them.

Contracted revenue is a promise. Promises are broken.

Live revenue is real. This is the number to watch.

In startups and in life, cash is king. 👑

More on tech:

Meet My Latest Investment: Zeon Systems

My Secret Weapon for Helping Founders Raise Millions

My Biggest Lesson from Four Years Angel Investing

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