Photo via Fast Company
The race for venture capital among AI startups has spawned a troubling trend: companies are systematically misrepresenting their actual revenue to appear more successful than they are. According to Scott Stevenson, CEO of legal AI startup Spellbook, many early-stage companies are blurring the lines between annual recurring revenue (ARR)—the annualized value of confirmed subscription contracts—and contracted annually recurring revenue (CARR), which includes projected future revenue. When pitching to the press, these startups often report the larger CARR figure while calling it ARR, creating an inflated perception of their market traction.
The mechanics of this deception vary, but the impact is consistent. Some startups count free pilot periods as revenue, others include multi-year contracts with opt-out clauses as if they were guaranteed, and some book revenue for features that haven't been built yet. According to Stevenson, the gap between real revenue and reported figures can be as much as 3 to 5 times larger. This practice is particularly concerning for investors and business leaders in Atlanta evaluating which AI vendors and partners are genuinely viable versus riding a wave of inflated metrics.
What makes this issue especially problematic is the cascading effect it creates across the startup ecosystem. When one company in a competitive space inflates its numbers, competitors may feel pressured to follow suit to avoid appearing weak by comparison. Venture capitalists, who typically have access to underlying contracts, may tacitly accept the practice for better headline numbers and PR coverage. Journalists and business publications—lacking contract access—often report these figures at face value, further amplifying the distortion.
For Atlanta's growing AI and tech community, this trend carries real risks. Employees of inflated startups may make career decisions based on misleading growth narratives, while enterprise customers could overestimate a vendor's stability and capabilities. The ripple effects undermine confidence in the entire sector at a time when legitimate innovation deserves investor and media attention. Business leaders evaluating AI solutions should dig deeper into actual invoiced revenue rather than accepting headline ARR claims.
