Chapter 1 Annual Contract Value ACV is your revenue brought in by new customers, or customers upgrading or renewing their existing contract. It correlates to a booking, in which a customer commits to spending a specific amount of money with your company. The key difference is that a booking in a subscription model is going to add to that repeating revenue stream, whereas one-time bookings do not. The beauty of subscription businesses is that they get the bulk of their ACV from their existing client base upgrading to better services. That said, you should also invest in sales and marketing to drive new ACV, because in combination with upselling, this increases your ARR. Future Growth If you run this play year over year, you’re growing by 20% annually, as long as you maintain an efficient growth efficiency ratio (if your GEI is less than 1, you grow even more). And when the time comes to finally start taking profits, you’re working off of a much bigger recurring revenue stream. Note that this is a basic overview of the business model. There are other factors at play: total addressable market, one-time sales/costs impacts, the effects of churn on GEI, and so on. You’re in the business of startups, you already know just how quickly things can change and new obstacles and costs can rear their heads. The Beauty of Predictable Revenue If you walk away from this chapter with nothing else, know this: Predictable revenue streams create a compounding growth effect. That’s why a dollar that a subscription company brings in is typically considered to be worth as six times as much as the dollar brought in by a company that gets most of its money the old way. Companies are using subscription models to attract and keep customers long term, constantly adding more and more services that create more revenue opportunities as well as a more intricate customer relationship, which dramatically reduces the potential for churn. All of these factors contribute to subscription valuations that are multiples of traditional product companies.