How VCs and founders use inflated ‘ARR’ to crown AI startups
TL;DR
Some AI startups are inflating their reported annual recurring revenue (ARR) numbers in public, and their investors are well aware of the practice. Founders and VCs quietly include forecasts, one-time deals, and pilot contracts in ARR figures to make growth look bigger than it is. The result: stretched valuations and a market that rewards storytelling over actual recurring revenue. Critics warn the practice distorts due diligence and could backfire once realistic revenue numbers surface.
Nauti's Take
There's an opportunity here: AI startups that report ARR cleanly will stand out as the market gets more skeptical, which favors disciplined operators over storytellers. The catch: inflated ARR figures stretch valuations, distort due diligence, and risk down-rounds and a sector-wide trust hit when realistic numbers surface.
For investors and founders, the practical move is to demand specifics — pure recurring revenue, not pilots or forecasts.
Video
Sources