The impact of great defensive metrics

A lot of investors underestimate the impact of great defensive metrics on recurring revenue business.

Let’s take 2 businesses with $100M in ARR at the start of year 1 and adding $20M of new ARR per year.

The first has a Gross Retention of 95% vs. 90% for the second.

In year 6, company #1 gets to ~$180M ARR vs. $150M for company #2. At equivalent exit multiple (take 8x ARR) this is a ~$250M / 15% value destruction / creation.

(p.s. I used what Dave Kellogg and I call "Lazy Gross Retention" in the maths below, i.e. GDR calculated at P&L level vs. cohorts level)