AI Startups Continue to Masquerade as SaaS Businesses; OpenAI Lays Off Some ‘Insider Risk’ Employees

Today, we’re talking about my favorite topic: sneaky things AI startups do to gussy up their revenue.

We previously covered how some AI startups are including non-recurring consulting fees in their annual recurring revenue figures; pitching investors on their “contracted ARR” or “sales pipelines”; and using exploding revenue growth to entice investors without explaining that much of the money is only coming from one or two large customers.

Here’s another one. The main reason investors love software-as-a-service startups so much is because their recurring revenue streams are predictable. Typically, customers sign annual contracts, and they face hefty cancellation fees if they try to get out of them early. That serves to both discourage customers from canceling and help the startup claw back some of its lost revenue.

Recently, investors have told me they've gotten pitches from AI startups that have impressive revenue growth at first blush. Only later after doing their own due diligence do the investors find out the startups have no cancellation fees, effectively letting customers pull out of their contracts whenever they want.