GoKawiilLast month, Scott Stevenson, co-founder and CEO of the legal AI startup Spellbook, took to X in an effort to expose what he called a “huge scam” among AI startups: inflation of the revenue figures that they announce publicly.
“The reason many AI startups are crushing revenue records is because they are using a dishonest metric. The biggest funds in the world are supporting this and misleading journalists for PR coverage,” he wrote in his tweet.
Stevenson isn’t the first to claim that annual recurring revenue (ARR) — a metric historically used to sum up annual revenue of active customers under contract — is being manipulated by some AI companies beyond recognition. Certain aspects of ARR shenanigans have been the subject of multiple other news reports and social media posts.
However, Stevenson’s tweet seemed to have struck a particular nerve within the AI startup community, drawing over 200 reshares and comments from high-profile investors, many founders, and a few headlines.
“Scott at Spellbook did a great job of highlighting some of what you might describe as bad behavior on the part of some companies,” Jack Newton, co-founder and CEO of legal startup Clio, told TechCrunch, adding that the post brought much-needed awareness to the topic, referring to an explanatory post from YC’s Garry Tan about proper revenue metrics.
TechCrunch spoke with over a dozen founders, investors, and startup finance professionals to assess whether the ARR inflation is as pervasive as Stevenson suggests.
Indeed, our sources, many of whom spoke on the condition of anonymity, confirmed that fudged ARR in public declarations is a common occurrence among startups, and how, in many cases, investors are aware of the exaggerations.
Not really revenue, yet
The main obfuscation tactic is substituting “contracted ARR,” sometimes referred to as “committed ARR” (CARR), and simply calling it ARR.
“For sure they are reporting CARR” as ARR, one investor said. “When one startup does it in a category, it is hard not to do it yourself just to keep up.”
... continue reading