How VCs and founders use inflated ‘ARR’ to crown AI startups

“Investors can’t call it out,” a VC told TechCrunch. “Everyone has a company monetizing CARR as ARR.”

Still, anyone intimately familiar with the industry’s intricacies has a hard time believing that some of these startups actually reached $100 million in ARR within a few years of launch.

“To everyone who’s inside, it just feels fake,” said Alex Cohen, co-founder and CEO of health AI startup Hello Patient. “You read the headlines and you’re like, ‘I don’t believe it.'”

However, not all startups feel comfortable representing growth by reporting CARR instead of ARR. They prefer to be clean and clear about their numbers in part because they understand that public markets measure software companies on ARR rather than CARR. These founders prioritize transparency.

Wordsmith’s McNairn, who remembers the struggle startups faced justifying high valuations after the 2022 market correction, said he doesn’t want to create an even higher hurdle by exaggerating his startup’s revenue. 

“I think it is short-sighted, and I think that when you do things like that for a short-term gain, you’re overinflating already crazy high multiples,” he said. “I think it’s super bad hygiene, and it’s going to come back and bite you.”