Published on April 24, 2026
In the competitive landscape of artificial intelligence, startups typically rely on accurate financial metrics to attract vital venture capital. Annual recurring revenue, or ARR, has been a cornerstone metric used to demonstrate a company’s growth potential. However, recent discussions reveal that some startups are manipulating this figure to appear more enticing to investors.
Scott Stevenson, the founder and CEO of Spellbook, recently highlighted this issue in a viral tweet. He accused AI startups of using “contracted annually recurring revenue,” or CARR, as a smokescreen to inflate their reported ARR figures. This misleading practice distorts the financial realities of these companies, undermining trust in the burgeoning AI market.
Stevenson’s concerns reflect a growing trend among startups that conflate current revenue with speculative projections. These practices range from counting contracts that allow for customer opt-outs as guaranteed income to counting free trial periods as real revenue. As a result, the gap between actual ARR and inflated figures can swell to as much as five times.
This inflated reporting not only misguides investors but also contributes to an unhealthy competitive environment among startups. If one company stretches the truth, others may feel pressure to follow suit. As skepticism about the actual earning potential of AI grows, this trend could exacerbate concerns and destabilize both emerging and established players in the market.
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