How VCs and founders use inflated ‘ARR’ to crown AI startups | TechCrunch

Scott Stevenson, co-founder of legal AI startup Spellbook, recently exposed what he called a "huge scam" among AI startups involving the inflation of revenue figures. He claimed that many AI startups are crushing revenue records by using a dishonest metric, with support from major funds and misleading journalists. This issue is not new, but Stevenson's tweet sparked significant discussion within the AI startup community. TechCrunch spoke with over a dozen founders, investors, and finance professionals to assess the prevalence of this practice. Sources confirmed that fudged ARR in public declarations is common, with many investors aware of the exaggerations. The main tactic is substituting "contracted ARR" (CARR) and calling it ARR. ARR is a metric established since the cloud era to indicate total sales of products where usage and payments are metered over time. CARR, however, counts revenue from signed customers that aren't onboarded yet, making it a much squishier metric. One investor noted that CARR can be 70% higher than ARR, even though a significant chunk of that contracted revenue will never materialize. The problem is that CARR is far more susceptible to being "gamed" than traditional ARR. Another issue is the use of "annualized run-rate revenue," which extrapolates current revenue over the next 12 months. This can be misleading because revenue is no longer locked into predictable contracts. The pressure to show rapid growth, especially in the AI hype, is prompting some VCs to support or overlook startups presenting inflated ARR figures. VCs are effectively helping to "kingmake" their own portfolio companies by turning a blind eye to public pronouncements of inflated ARR. However, not all startups feel comfortable representing growth by reporting CARR instead of ARR. They prefer to be transparent, understanding that public markets measure software companies on ARR rather than CARR. Some founders believe that exaggerating revenue is short-sighted and will eventually come back to bite them.

(Source：Nyt News Today)