An 'annualized run rate' is a simple calculation: take revenue for a short period, a month or a quarter, and multiply it to get a year. A company that brought in $5 million last month can say it has 'a $60 million annual revenue run rate.' It is a useful number for fast-growing companies, because last year's revenue no longer reflects the current situation.
ARR (annual recurring revenue) is a related but stricter term: it includes only revenue from recurring contracts, such as subscriptions, not one-time revenue. In software companies, ARR is one of the most important numbers, because it shows how much money is expected over the next year if no customer leaves and no new customer arrives. Wix, for example, reported ARR of more than $2 billion this week.
The problem is that these numbers are flexible. A company can pick its best month and multiply it by 12. It can include usage revenue, which may fall next month, and call it 'recurring.' It can count customers in a trial period, or large discounts that will end. And at AI companies, where customers pay by usage rather than a fixed subscription, the gap between 'run rate' and guaranteed revenue is especially large.
How do you read these numbers wisely? First, ask how they were calculated: based on which month, and what exactly is included. Second, compare them with actual revenue when it is published: a public company must report it under binding rules, a private one does not. Third, check retention: high ARR is worth little if a large share of customers leave within a year.
The bottom line: a 'run rate' is a legitimate tool, but it is a promise, not a result. When a private company boasts such a number, especially during a period of fundraising and IPOs, remember that it chose how to calculate it, and chose to present it right now.
