{"id":626,"date":"2025-09-06T02:53:21","date_gmt":"2025-09-06T02:53:21","guid":{"rendered":"http:\/\/www.alaskansawmill.com\/?p=626"},"modified":"2025-09-11T13:19:04","modified_gmt":"2025-09-11T13:19:04","slug":"arr-vs-err-why-every-dollar-isnt-equal","status":"publish","type":"post","link":"http:\/\/www.alaskansawmill.com\/index.php\/2025\/09\/06\/arr-vs-err-why-every-dollar-isnt-equal\/","title":{"rendered":"ARR vs. ERR: Why every dollar isn\u2019t equal"},"content":{"rendered":"

Hello and welcome to The GTMnow Newsletter \u2013 the media brand of VC firm, GTMfund<\/a>. Build, scale and invest with the best minds in tech. <\/em><\/p>\n

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Contracts have changed in the age of AI<\/strong>, and that means founders need to look at growth numbers through a new lens. Going from $0 to $2M in six months may sound impressive, but in practice that could be based on short-term pilots, with half of that revenue gone once the trials expire.<\/p>\n

Instead of the 12-month commitments that defined SaaS for the last decade, many buyers are now asking for short pilots with easy opt-outs. These deals signal experimentation more than conviction, and as a result, a huge share of AI revenue today is what\u2019s being called Experimental Runrate Revenue (ERR).<\/p>\n

ERR is essentially unstable revenue from short pilots, opt-out contracts, or deals that only count once they convert. It can spike quickly as pilots stack up but just as easily collapse when those trials don\u2019t turn into long-term commitments. That\u2019s why contracting discipline matters more than ever. To turn experiments into durable revenue, you need to structure the deal the right way and then manage the process to ensure conversion.<\/p>\n

This challenge is one that every AI company is facing, yet it\u2019s rarely covered in the broader conversation. This edition breaks down both sides.<\/p>\n

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ARR vs. ERR: Why every dollar isn\u2019t equal<\/h2>\n

New benchmarks are circulating, such as a16z\u2019s latest growth data<\/a> for early-stage companies, but topline revenue numbers don\u2019t tell the full story. In the AI era, contracts look very different, which changes how we should think about Annual Recurring Revenue (ARR).<\/p>\n

While you don\u2019t need a refresher on ARR, it\u2019s worth underlining why it matters: retention and recurrence<\/strong>. True ARR is predictable and easy to forecast. It becomes more profitable over time as customers \u2013 who were expensive to acquire \u2013 turn into stable, recurring cash flow.<\/p>\n

This is where contracts in today\u2019s AI landscape are impacting ARR. Instead of signing clean, 12-month commitments that defined SaaS for the last 15+ years, buyers are now asking for short pilots with easy opt-outs. The standard we\u2019re seeing is a 3-month pilot with a pre-defined conversion to an annual contract. The customer can walk away at any time within the trial period with no penalty.<\/p>\n

This new reality presents two key challenges:<\/p>\n

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  1. How revenue gets reported.<\/strong> Many teams are booking pilot revenue as ARR in decks and updates, even when the customer isn\u2019t paying full price yet and can churn in 12 weeks. It\u2019s not surprising to see companies go from $0 to $1M ARR in 3 months with no visibility on how much is real ARR versus pilot dollars.<\/li>\n
  2. How customers see their commitment.<\/strong> From the buyer\u2019s perspective, this isn\u2019t ARR yet, it\u2019s a trial balloon. They\u2019re under pressure to test AI tools quickly, so they sign multiple pilots, run them across teams, and only keep the ones that stick.<\/li>\n<\/ol>\n

    This revenue is being framed as Experimental Runrate Revenue (ERR)<\/a>. ERR is inherently unstable \u2013 it can spike quickly as pilots stack up but can just as quickly collapse when those trials don\u2019t convert.<\/p>\n

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    The risk for founders is assuming ERR behaves like ARR. Pilots don\u2019t guarantee long-term retention. Until they convert, treat ERR as a leading indicator of demand, not the durable foundation you can scale headcount and burn against. The market pull for some of these AI tools is unlike anything we\u2019ve seen before, and that urgency is a huge advantage for every startup.<\/p>\n

    The go-forward strategy<\/h2>\n

    The debate between ERR and ARR may not be as exciting as chasing historical growth rates, but it changes how deals are won, measured, and sustained. Revenue dynamics are shifting in ways founders and operators can\u2019t afford to ignore.<\/p>\n

    1. Scrutinize your contracts<\/h3>\n

    Every dollar isn\u2019t equal. A $1.7M \u201crun-rate\u201d headline means little if half of it can evaporate next quarter. Go line-by-line and ask: What portion is true ARR versus ERR? Which contracts are fully committed, and which are still pilots with opt-outs? At Seed and Series A, investors are reading these carefully.<\/p>\n

    2. Pressure test the budget story<\/h3>\n

    Ask customers (and yourself) where the budget is coming from. Is this spend locked in, or is it sitting in an \u201cexperimental AI\u201d line item that may disappear? That\u2019s not necessarily a bad thing (it\u2019s often where adoption starts), but you need to know what milestones move you from \u201cexperimental\u201d to \u201cessential\u201d in the buyer\u2019s budget.<\/p>\n

    3. Align internally on revenue recognition<\/h3>\n

    What do you call ARR? When can you book revenue, and how will you recognize it across the contract? Many first-time founders are navigating this for the first time. With more variability in pricing and contract structure, getting revenue operations right from day one is foundational.<\/p>\n

    The good news is there\u2019s never been a more exciting time to build. But with growth and customer pull come quirks like evolving contract structures and experimental budgets. As those experimental budgets harden into \u201cmust-have\u201d line items, founders who treat revenue recognition as a strategic discipline will be in the best position to scale sustainably.<\/p>\n

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    Share<\/a><\/p>\n

    Tag @GTMnow so we can see your takeaways and help amplify them.<\/em><\/p>\n

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    More for your eardrums<\/strong><\/h4>\n

    GTM 161: How to Build a GTM Roadmap<\/a><\/strong><\/p>\n

    Paul Williamson<\/a> (ex-Plaid, $3M \u2192 $300M ARR) on sequencing GTM bets, spotting high-value clients, and building forward-compatible roadmaps.<\/p>\n

    Listen on Apple<\/a>, Spotify<\/a>, YouTube<\/a> or wherever you get your podcasts by searching \u201cThe GTMnow Podcast.\u201d<\/p>\n

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    Startups to watch<\/strong><\/h4>\n

    Coffee<\/a><\/strong> just made Salesforce and your GTM stack chat-native<\/a>. With their new MCP interface, you can now use ChatGPT 5 or Claude to pull answers directly from Salesforce, HubSpot, Google Workspace emails and meetings, and any enrichment data tied to your contacts and accounts. Instead of clicking through dashboards, you can just ask questions like, \u201cWhich deals in my pipeline are stuck past 30 days?\u201d<\/em> or \u201cShow me all enterprise accounts with open support tickets.\u201d<\/em> The answers come back instantly, right inside your AI assistant.<\/p>\n

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    More for your eyeballs<\/strong><\/h4>\n

    AngelList\u2019s H1 2025 report shows venture slowly stabilizing after a turbulent few years<\/a>. AI and Robotics continue to dominate, drawing nearly 60% of all capital. Seed rounds are holding steady at around $20M, Series B has climbed to $400M, and while many COVID-era startups are still under pressure, the 2023\u201324 AI cohorts are emerging as the clear winners.<\/p>\n

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    Hottest GTM jobs of the week<\/strong><\/h4>\n
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    1. Manager, Sales Development \u2013 EMEA<\/a> at Vanta (Hybrid \u2013 Dublin, Ireland)<\/em><\/li>\n
    2. Director of Customer Success<\/a> at Vividly (Remote \u2013 USA)<\/em><\/li>\n
    3. Growth Marketing Manager<\/a> at Alt (Remote \u2013 USA)<\/em><\/li>\n
    4. Enterprise Customer Success Manager<\/a> at Gorgias (Remote \u2013 Vancouver)<\/em><\/li>\n
    5. Vice President, Sales<\/a> at Amper (Remote \u2013 USA)<\/em><\/li>\n<\/ol>\n

      See more top GTM jobs on the GTMfund Job Board<\/a>.<\/p>\n

      If you\u2019re looking to scale your sales and marketing teams with top talent, we couldn\u2019t recommend our partner Pursuit<\/a> more. We work closely together to be able to provide the top go-to-market talent for companies on a non-retainer basis.<\/em><\/p>\n

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      GTM industry events<\/strong><\/h4>\n

      Upcoming events you won\u2019t want to miss:<\/em><\/p>\n