AI startups inflate ARR metrics with VC complicity, insiders reveal

Key facts

• Scott Stevenson, CEO of Spellbook, called ARR inflation a 'huge scam' on X.
• Stevenson's tweet received over 200 reshares and comments from investors and founders.
• TechCrunch interviewed over a dozen founders, investors, and finance professionals.
• Sources confirmed fudged ARR is common among AI startups.
• The main tactic is substituting 'contracted ARR' (CARR) for ARR.
• CARR counts revenue from signed but not yet onboarded customers.
• One VC reported companies where CARR is 70% higher than ARR.
• A former employee said a startup counted a yearlong free pilot as ARR, with board knowledge.
• Another source described a $50 million claimed ARR versus $42 million actual.
• Some founders use annualized run-rate revenue, extrapolating short-term usage-based revenue.
• Investors often turn a blind eye to inflate valuations and attract talent.
• Jack Newton of Clio said VCs look the other way when companies inflate numbers.
• Michael Marks of Celesta Capital said higher valuations increase incentives to inflate.
• Hemant Taneja of General Catalyst expects startups to grow ARR from 1 to 20 to 100.
• Ross McNairn of Wordsmith called the practice short-sighted and bad hygiene.
• Alex Cohen of Hello Patient said the headlines feel fake to insiders.