The Gospel of Recurring Revenue (And Why It Might Be Wrong)

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In the world of search funds and ETA (entrepreneurship through acquisition), one mantra echoes louder than the rest: find recurring revenue.

You’ve heard it before. Investors, advisors, conference panels, even podcasts all repeat the same advice. A business with recurring revenue is assumed to be safer, more predictable, and more likely to deliver strong investor returns.

But is it true?

A recent study analyzing 59 search fund exits put this belief to the test. The goal was simple: determine whether the percentage of recurring revenue at the time of acquisition correlated with stronger financial outcomes — specifically multiples of invested capital (MOIC) and internal rate of return (IRR).

The results? Surprisingly, there was no statistically significant relationship.

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That means companies with high recurring revenue did not consistently outperform companies with little or no recurring revenue in terms of investor returns. In fact, outcomes were scattered across the board. Some businesses with 0% recurring revenue crushed it. Some with 100% recurring revenue underwhelmed.

This challenges a core tenet in ETA land. If recurring revenue doesn’t predict returns, why is it treated like gospel?

The answer likely lies in perception. Recurring revenue feels safer. It looks better in a deck. It attracts investors. But the data shows it’s not the magic formula many believe it to be.

As entrepreneurs and investors, it’s worth asking: are we overvaluing recurring revenue while undervaluing other factors that actually drive returns?

Sometimes, challenging dogma is where the best opportunities lie.