tech
How VCs and founders use inflated ‘ARR’ to kingmake AI startups
Some AI startups are stretching traditional revenue metrics when talking about progress publicly. And their investors are fully aware.
TL;DR
- AI startups are reportedly inflating their publicly announced revenue figures by misrepresenting metrics like Annual Recurring Revenue (ARR).
- A common tactic involves substituting 'contracted ARR' (CARR) for actual ARR, which includes revenue from signed contracts not yet implemented.
- Investors are often aware of these exaggerations and may even support them to create a narrative of rapid success for their portfolio companies.
- The intense competition and pressure for rapid growth in the AI sector incentivize companies to inflate their numbers.
- While not a new phenomenon, ARR overstatements have become more aggressive amid the AI hype.
- Some founders prioritize transparency and avoid using CARR as ARR, fearing long-term consequences.