Scott Stevenson exposes ARR inflation among AI startups, alleging VCs knowingly support inflated revenue claims for PR coverage

Spellbook co-founder Scott Stevenson publicly called out AI startups for inflating annual recurring revenue (ARR) figures, claiming major venture funds support the misrepresentation and mislead journalists. His post drew over 200 reshares and comments from investors and founders.

The main tactic: startups report 'contracted ARR' (CARR) — revenue from signed customers not yet onboarded — as standard ARR. One VC reported seeing companies where CARR was 70% higher than actual ARR, with a significant portion of contracted revenue never materializing. A second issue involves annualized run-rate ARR, which extrapolates current revenue over 12 months, problematic for AI companies charging usage-based fees.

At least one high-profile enterprise startup publicly claimed it surpassed $100 million in ARR when only a fraction came from paying customers; the rest was from undeployed contracts that could take long to implement or be cancelled. One company counted a yearlong free pilot as ARR, with its VC-inclusive board aware of the practice.

Investors and founders acknowledge the practice is common. VCs have incentives to overlook inflated public numbers to build narratives of 'runaway winners' and secure press coverage, according to Hemant Taneja (General Catalyst) and Jack Newton (Clio).