The AI investing boom (or perhaps bubble) is something Silicon Valley has seen many times before: a gold rush of VC money thrown at the Big New Thing. But one aspect of it is completely unique to these times: startups rocketing from $0 to as much as $100 million in annual recurring revenue, sometimes in a matter of months.
Word on the street is that many a VC won’t even look at a startup that’s not on the ARR superhighway, aiming for $100 million in ARR before their Series A funding round.
But Andreessen Horowitz general partner Jennifer Li, who helps oversee many of the firm’s most important AI companies, warns that some of the ARR mania is based on myths.
“Not all ARR is created equal, and not all growth is equal either,” Li said on an episode of TechCrunch’s Equity podcast. She said to be especially skeptical of a founder announcing spectacular ARR numbers or growth in a tweet.
Now, there is a legit, well-recognized term in accounting called annual recurring revenue, which refers to the annualized value of contracted, recurring subscription revenue. Essentially, that’s a guaranteed level of revenue because it comes from customers on a contract.
But what many of these founders are tweeting about is really “revenue run rate” — taking whatever money was paid in a period of time and annualizing it. That’s not the same.
“There’s a lot of missing nuances of the business quality, retention, and durability that’s missing in that conversation,” Li warned.
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A founder may have just had a killer month of sales, but not every month will necessarily repeat it. Or a startup may have a lot of short-term customers doing pilot programs, so revenue isn’t guaranteed to stick around after the pilot period.
Normally, such boasts about growth via tweets should be treated for what they are: don’t believe everything you read on the internet at face value.
But because fast-growth is a hallmark of AI startups, such claims are “introducing a lot …