VCs and AI startups inflating revenue metrics to boost valuations
Original: How VCs and founders use inflated ‘ARR’ to crown AI startups
Why This Matters
Highlights concerning trend of inflated metrics distorting AI startup valuations and market perceptions
AI startup Spellbook's CEO Scott Stevenson exposed widespread manipulation of annual recurring revenue (ARR) figures among AI companies. Industry sources confirm startups commonly report contracted ARR as actual ARR, inflating numbers by up to 70% with investor knowledge.
Scott Stevenson of legal AI startup Spellbook posted on X claiming AI startups are using "dishonest metrics" to inflate revenue figures, with major VCs supporting the practice for PR coverage. The post drew over 200 reshares from prominent investors and founders. TechCrunch spoke with over a dozen industry professionals who confirmed that fudged ARR reporting is common. The main tactic involves reporting "contracted ARR" (CARR) - revenue from signed but not yet onboarded customers - as actual ARR. One VC noted seeing companies where CARR exceeds ARR by 70%, though much contracted revenue never materializes. Traditional ARR measures total sales from active customers under contract, while CARR includes uncommitted future revenue. Sources said when one startup in a category inflates metrics, others feel pressure to follow suit.