AI Startups Accused of Inflating Revenue Metrics to Secure VC Funding

Thousands of AI startups are competing for venture capital funding to capture a share of the enterprise market. However, Scott Stevenson, founder and CEO of the legal AI startup Spellbook, alleges that many are inflating their actual revenues to secure investment.

In a viral tweet on April 17, 2026, Stevenson accused these companies of perpetuating a “huge scam” in their metric reporting. He specifically targeted the misuse of annual recurring revenue (ARR), a key performance indicator in the AI startup ecosystem.

ARR is designed to show the annualized value of recurring subscription contracts. It is typically calculated by projecting the current month’s subscription revenue over a full year. For example, if a startup invoices $1 million in January, its ARR for the year would be $12 million, assuming the same monthly revenue continues.

CARR vs. ARR: The Growing Discrepancy

Stevenson argues that some AI startups are blurring the lines between ARR and contracted annually recurring revenue (CARR), which includes future revenues that are far from certain. He explains that while CARR can legitimately describe the value of long-term contracts in sectors like healthcare AI or energy optimization, it should not be confused with ARR, which only includes subscription revenue that can be invoiced to the customer.

“Often in decks CARR and ARR are reported as separate metrics, but when companies go to press they are actually reporting CARR and calling it ARR, in order to have the biggest number possible,” Stevenson told Fast Company in an email exchange.

Stevenson notes that the gap between these metrics has widened significantly. “I know 100% of confirmed cases where the gap is as much as 3-5x,” he said.

Common Tactics Used to Inflate Revenue

Stevenson outlined several ways startups manipulate these metrics:

• Opt-out clauses: Counting a full year of revenue even if contracts allow customers to opt out after one month.
• Free pilots: Counting a free three-month “pilot” as three months of real revenue.
• Unbuilt features: Counting revenue from months during which a feature is being built, with payment scheduled to start once the feature is complete.

“I was talking to an investor yesterday who sees that all the time from early-stage companies,” Stevenson said on a recent TBPN podcast. “Coming out of accelerators, saying they have a million ARR, and they look under the hood and it’s just all pilots that haven’t converted yet.”