The New Fake Math of AI Startup ARR: Not So Annual, Not So Recurring

Being a venture capitalist investing in AI startups these days isn’t that different from being a detective. Much of the job, VCs tell me, is sniffing out the BS and separating it from reality.

Nowhere is that more true than when analyzing startups’ top lines. 

We’ve talked in the past about how some AI startups are pitching investors on their “contracted ARR” (or the revenue that could come from signed contracts with customers once the startup delivers that product or service over time) or their “sales pipeline” (or ​​the value of all the potential contracts that could close by the end of the year).

But now, VCs are starting to pick up on red flags even in traditional revenue figures, like annual recurring revenue (the subscription revenue expected over the next 12 months, based on the current monthly subscription revenue).

Investors say they are increasingly seeing young AI startups that jump from $0 to $2 million in ARR in just a few months. That’s typically a good sign. But, once they dig a little deeper, investors often find that revenue is concentrated in one or two large customers, often a consulting firm like PwC. In these cases, consulting firms are usually just testing out the product to see if it’s good enough to resell to their customers, VCs say.