ARR ≠ Traction ≠ ARR
Not all ARR is traction, and not all traction is ARR.
Putting aside the obvious problem of the ambiguity of ARR itself, I think there's a common mistake amongst founders and investors alike: assuming that ARR = traction.
To state the obvious, revenue is a good sign of people willing to pay for a product or service - and in the long-run, any company that wants to become valuable will have to generate revenue as a necessary (but not sufficient) input to generating cashflows. But it doesn't always hold that ARR in the short-term is a leading indicator of the long-run value creation potential, nor that the absence of ARR in the short-term is a damning condemnation of the same.
The primary role of a start-up is to test hypotheses on how to create value for a given customer/user base, and how to extract some of that value from which to build a business. To get a bit nerdy, you can think of the independent variable as the value proposition 'test' that you're running - the thing you are varying to test how it impacts a given outcome metric (the dependent variable). If you are proving independent variables that drive dependent variables that causally relate to long-run value (and revenue) - even if the dependent variable itself is not revenue - you’re in a good spot.
Let's unpack each angle of the non-equivalence in turn.
ARR ≠ Traction
Obviously, ARR is not always traction. As discussed briefly in the post on negative gross margins, it's easy to generate rapid revenue growth if you're selling £10 notes for £5. I bet I could scale top-line pretty quickly if that was my business model.
Racing to an arbitrary ARR number with cheap/inflated revenue is sort of pointless.
Traction ≠ ARR
Traction shows up in many ways that aren’t revenue. DeepTech and BioTech are obvious examples, but there are also plenty of examples from the app layer.
Duolingo has millions of users before a penny of revenue. Facebook the same. User growth and engagement are a precursor to long-run durable revenue, so I’d much rather you spend time building those (particularly if your business relies on network effects) rather than choking demand growth with paywalls.
Sure, at some point you need to make someone pay for the value that’s being created, but depending on the context, it isn’t the most important indicator of traction.
Overall, step back and evaluate what the hypotheses are that you need to prove along your start-up journey, and carefully pick the correct variables to test. You get the VCs you deserve, and the best VCs will see it immediately.