AI founders and VCs accused of inflating revenue metrics to ‘kingmake’ startups
Venture capital firms and artificial intelligence startups are reportedly substituting contracted revenue for actual recurring income to exaggerate growth, a move that helps attract talent and customers despite lacking accounting rigour.
Scott Stevenson, co-founder and chief executive of legal AI startup Spellbook, has publicly accused the artificial intelligence sector of manipulating annual recurring revenue (ARR) figures to exaggerate growth, describing the practice as a “huge scam.” Stevenson’s allegations, posted on X, have drawn significant attention from the venture capital and startup community, with the post garnering over 200 reshares and commentary from high-profile investors and founders. His claims have struck a nerve, prompting a broader industry conversation about the integrity of revenue metrics used to value high-growth technology companies.
TechCrunch interviewed over a dozen founders, investors, and finance professionals to assess the prevalence of these practices. Many sources, speaking on condition of anonymity, confirmed that inflating ARR figures is a common occurrence within the AI sector. The primary method of inflation involves substituting “contracted ARR” (CARR), or committed ARR, for traditional ARR. CARR includes revenue from signed contracts that have not yet been implemented or onboarded, allowing startups to report higher valuations despite the figures not reflecting collected cash.
One investor noted that CARR can be up to 70% higher than actual ARR, with significant portions of contracted revenue never materialising due to churn or implementation failures. A former employee of a startup revealed that the company counted a substantial, year-long free pilot as ARR, a practice known to the board and a venture capital investor. Another case cited involved a startup claiming $50 million in ARR in marketing materials, while the actual figure was $42 million; investors were aware of the discrepancy but viewed the gap as negligible given the company’s growth trajectory.
Hemant Taneja, CEO of General Catalyst, highlighted the pressure for hyper-growth, noting that linear growth is no longer sufficient to attract investment in the current AI landscape. This pressure has led some venture capital firms to support, or at least overlook, startups presenting inflated ARR figures to the public. By turning a blind eye to public pronouncements of inflated ARR, VCs are effectively helping to kingmake their own portfolio companies, making them more likely to attract the best talent and customers who believe the company is the undisputed winner in its category.
Not all founders are comfortable representing growth by reporting CARR instead of ARR. Ross McNairn, co-founder and CEO of legal AI startup Wordsmith, described the practice as “super bad hygiene” and short-sighted. McNairn argued that exaggerating revenue creates an even higher hurdle for startups to justify valuations in the public markets, where software companies are measured on ARR rather than CARR. He warned that overinflating multiples for short-term gain will eventually come back to bite companies and the broader market.
