AI startups accused of inflating revenue by blurring ARR and CARR metrics

Scott Stevenson, cofounder and CEO of legal AI startup Spellbook, says some AI startups are inflating revenue figures by reporting contracted annually recurring revenue as annual recurring revenue. In a viral tweet on April 17, Stevenson called the practice a "huge scam" and said the biggest funds in the world are supporting it and misleading journalists for PR coverage. ARR is meant to show the annualized value of recurring subscription contracts, typically calculated by projecting current monthly subscription revenue over a full year. Stevenson said some startups blur ARR with CARR, which can include future revenue that is far from certain. "Often 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," Stevenson told Fast Company. He said he knows of confirmed cases where the gap between the two metrics is as much as three to five times. The obfuscation can take several forms. A startup might count a full year of revenue even if contracts allow a customer to opt out after one month. Or it might count a free three-month pilot as real revenue. Stevenson said on a recent podcast that investors frequently see early-stage companies coming out of accelerators claiming a million dollars in ARR when the revenue consists entirely of unconverted pilots. The post drew agreement from venture capital partners. Equal Ventures partner Rick Zullo wrote that the practice is "rampant and it's honestly distorting the benchmarks for everyone." FPV Ventures partner Nikunj Kothari said he has stopped looking at headline numbers for this reason.