What is NRR in VC?

Net Revenue Retention (NRR), also referred to as Net Dollar Retention (NDR), is a crucial metric that venture capitalists (VCs) use to evaluate the growth potential and long-term sustainability of a startup, particularly in SaaS (Software as a Service) or subscription-based business models. NRR measures how much revenue a company retains and expands from its existing customer base, accounting for upsells, cross-sells, downgrades, and customer churn.

What is NRR?

NRR measures how revenue from existing customers evolves over a specific period by including not just the negative impact of churn but also the positive impact of additional revenue from existing customers. It is calculated using the following formula:

This gives a percentage that shows whether the company is growing or losing revenue from its current customers. For instance, if NRR is 120%, it means the company has grown its revenue from existing customers by 20% after accounting for churn and downgrades.

Why NRR Matters to VCs

1. Revenue Growth from Existing Customers: NRR shows how well a company is generating additional revenue from its existing customers through upselling or cross-selling. A high NRR suggests that customers are not only satisfied but also willing to spend more, which is a sign of product-market fit and scalability—key factors VCs look for.
2. Core Business Health: High NRR in SaaS businesses or other subscription models often signals that customers find the product valuable enough to stay and increase their spending over time. This indicates that the company has a strong retention strategy and can grow even without heavy spending on customer acquisition.
3. Capital Efficiency: Startups with high NRR grow more efficiently because they rely less on acquiring new customers to expand revenue. Retaining and growing existing customers is usually more cost-effective than acquiring new ones, making NRR a critical indicator of capital efficiency.

NRR Benchmarks in Venture Capital

• Above 100%: A company with NRR over 100% is considered strong because it means the company is growing its revenue from existing customers. Startups with NRR above 110% are particularly attractive to VCs, as this indicates substantial upsell opportunities and long-term growth potential.
• Below 100%: If NRR is below 100%, it signals that churn and downgrades are negatively affecting revenue more than upsells and cross-sells are adding to it. This may indicate retention issues, which can limit growth and reduce a company's appeal to investors.

How Startups Can Improve NRR

• Invest in Customer Success: A dedicated customer success team can help ensure that customers continue using the product effectively, reducing churn and increasing the likelihood of upselling.
• Enhance Product Value: Improving the product with features that meet customer needs can boost retention and expansion opportunities, ultimately increasing NRR.
• Upsell and Cross-sell Strategies: Offering additional services or higher-tier plans can encourage customers to expand their spending with the company, further increasing NRR.

Conclusion

NRR is a critical metric for venture capitalists assessing the growth potential of startups, particularly those with a subscription or recurring revenue model. High NRR indicates that the company not only retains customers but also grows revenue from them, suggesting strong customer relationships and a scalable business model. Startups that can effectively increase their NRR will be more attractive to VCs, as they demonstrate both customer satisfaction and sustainable growth.