{"id":11519,"date":"2026-04-25T01:26:32","date_gmt":"2026-04-25T01:26:32","guid":{"rendered":"https:\/\/wildgreenquest.com\/?p=11519"},"modified":"2026-04-25T01:26:32","modified_gmt":"2026-04-25T01:26:32","slug":"ai-startups-are-inflating-a-key-revenue-metric-to-win-vc-attention-says-this-founder","status":"publish","type":"post","link":"https:\/\/wildgreenquest.com\/?p=11519","title":{"rendered":"AI startups are inflating a key revenue metric to win VC attention, says this founder"},"content":{"rendered":"


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Thousands of AI startups are fighting for the VC funding needed to win a slice of the enterprise market. But according to Scott Stevenson, cofounder and CEO of the legal AI startup Spellbook<\/a>, many are inflating their real revenue to get it. In a viral tweet<\/a> on April 17, Stevenson called out these fledgling companies for perpetuating a “huge scam” in their metric reporting.<\/p>\n

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It\u2019s time to expose a huge scam in AI startups: Contracted ARR
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.
The setup:\u2026 pic.twitter.com\/NQ0qFSntsJ<\/a><\/p>\n

— Scott Stevenson (@scottastevenson) April 17, 2026<\/a><\/p><\/blockquote>\n<\/div>\n<\/figure>\n

Specifically, Stevenson\u2019s tweet concerned the misuse of a revenue metric common in the AI startup world. Annual recurring revenue, or ARR, is meant to show the annualized value of recurring subscription contracts. It\u2019s typically calculated by projecting the current month\u2019s subscription revenue over a full year. So if a startup invoices $1 million in January, its ARR for the current year would be $12 million, on the assumption that the same monthly revenue will continue.<\/p>\n

He said some AI startups have begun basing ARR figures on future revenue that is far from certain, noting that they do this by blurring ARR with something called CARR, or \u201ccontracted annually recurring revenue,\u201d which can include future revenue.<\/p>\n

\u201cOften in decks CARR and ARR are reported as separate metrics, but when companies go to press they are actually reporting CARR and calling it ARR in order to have the biggest number possible,\u201d Stevenson told Fast Company<\/em> in an email exchange.\u00a0<\/p>\n

CARR can be used legitimately to describe the value of long-term contracts, such as in healthcare AI or energy optimization, where revenue accrues gradually over a lengthy deployment. \u201cInitially this may have been innocent as companies were trying to get a little extra credit for deals they signed that were not live,\u201d Stevenson said.<\/p>\n

But CARR shouldn\u2019t be confused with ARR, which includes only subscription revenue that can be invoiced to the customer. \u201cThe gap between these metrics has grown massively,\u201d Stevenson said. \u201cI know 100% of confirmed cases where the gap is as much as 3-5x.\u201d<\/p>\n

In practice, the obfuscation can take a few different forms. A startup might, for example, count a full year of revenue even if its contracts allow a customer to opt out after one month. Or a startup might count a free three-month \u201cpilot\u201d as three months of real revenue.\u00a0<\/p>\n

“I was talking to an investor yesterday who sees that all the time from early-stage companies,\u201d Stevenson said on a recent TBPN<\/em> podcast<\/a>. \u201cComing out of accelerators, saying they have a million ARR, and they look under the hood and it’s just all pilots that haven’t converted yet.”<\/p>\n

Or a startup might write in a contract that the customer will start paying for a certain feature after it’s built. The startup then counts revenue from the months during which the feature is being built. But there\u2019s just no guarantee the feature\u2014or the revenue\u2014will ever come to fruition. <\/p>\n

The post also drew a wave of agreement from founders and VC partners in the replies. “This is rampant and it\u2019s honestly distorting the benchmarks for everyone,” wrote<\/a> Equal Ventures partner Rick Zullo. FPV Ventures partner Nikunj Kothari added<\/a>, “I have stopped looking at headline number for this reason.\u201d<\/p>\n

As some commenters on Stevenson\u2019s X post pointed out, a VC considering an investment will likely examine a startup\u2019s contracts and separate real revenue from projected revenue. Journalists, by contrast, typically lack access to those contracts and may take startups at their word that ARR reflects actual revenue.<\/p>\n

According to Stevenson, journalists should probe startups on whether their whole ARR number really reflects \u201clive\u201d revenue (invoiced revenue) or if some of it is \u201ccontracted ARR,\u201d noting that some VCs may go along with the deception. <\/p>\n

\u201cI feel like there is a bit of a \u2018silent pact\u2019 between founders and VCs not to discuss the difference with press, and to often use the bigger number for more coverage,\u201d he said.<\/p>\n

Some insidious second-order effects could follow. <\/p>\n

If one AI startup in a given space begins inflating its revenue using an elastic definition of ARR\u2014or even just appears to\u2014others in the space, perhaps fearing the appearance of falling behind, may feel pressured to follow suit.<\/p>\n

\u201cThese illusions can create mania, cause companies to chase each other’s ghosts, and to do risky things that they shouldn’t\u2014also very bad for employees who may not understand real ARR numbers, and for customers trying to understand the landscape,\u201d Stevenson said.<\/p>\n

There is already widespread skepticism<\/a> about the earning potential of AI companies. That skepticism extends to Big Tech firms and AI labs spending heavily on large models and data centers, as well as to smaller startups building enterprise applications on top of those models. Overestimating the impact of any of these players only adds more air to the bubble.<\/p>\n

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