AI Startups Are Gaming Their Revenue. Public Markets Won't Forget
AI startups are quietly inflating revenue figures while their investors look away. Here is how the ARR game works, and why Indian founders and SEBI should be watching.
The News
TechCrunch reported on 22 May 2026 that a growing number of AI startups are dressing up their revenue figures, and their investors are letting them. The piece, by Marina Temkin, follows a public broadside from Spellbook chief executive Scott Stevenson, who last month called the practice a "huge scam" and said AI firms are "crushing revenue records" using "a dishonest metric".
That metric is annual recurring revenue, or ARR, the headline number used to value software businesses. The report describes several ways founders stretch it. The most common is to quote "contracted" or "committed" ARR, money tied to signed deals not yet deployed, and present it as plain ARR. One investor told TechCrunch that contracted ARR can run 70% higher than the real figure.
Other tactics are blunter. One company counted a yearlong free pilot as recurring revenue. Another annualises a single strong quarter, month or even day, a shaky move for AI products billed by usage. The report cites a startup claiming $50M in ARR when the true figure was $42M, and a high-profile enterprise startup citing over $100M ARR when only a fraction comes from paying customers.
Why It Matters
Inflated metrics are not new. WeWork's 2019 "community-adjusted EBITDA" became shorthand for a startup inventing arithmetic to flatter itself, and its failed IPO that year erased tens of billions in paper value. The AI cycle has revived the same temptation, with larger sums at stake.
The incentive structure is the real story. Celesta Capital's Michael Marks put it plainly: as valuations climb, "the incentives are stronger to do it." General Catalyst's Hemant Taneja has argued AI companies must grow at a blistering pace, "1 to 20 to 100" rather than "1 to 3 to 9 to 27", and that expectation nudges founders towards generous accounting. Venture firms benefit too, since a portfolio company that looks like a runaway winner draws press, talent and customers. Wordsmith's Ross McNairn warned the bill comes due when public markets, which judge companies on real ARR, force a reckoning.
Indian Angle
For India's startup economy this is a familiar warning. The 2023 GoMechanic episode, in which founders admitted "grave errors in judgement" over financial reporting, showed how fast a celebrated startup unravels once its numbers fail to hold. India's SaaS sector has long been its cleanest export story, from Zoho to Nasdaq-listed Freshworks. It now has a fresh AI cohort, including Sarvam AI and Krutrim, raising at rich multiples where the same ARR-versus-CARR temptation applies.
Regulators have already moved. SEBI tightened disclosure rules for new-age technology companies after the 2021-22 listing wave, requiring clearer reporting of key performance indicators and the basis for valuations in offer documents. An Indian AI startup eyeing a domestic IPO cannot quietly carry contracted revenue into its prospectus the way a private funding round might tolerate.
Indian founders and limited partners should read revenue claims with discipline. Ask what share of ARR is live and paying, how much sits in undeployed contracts, and whether early-year discounts are being booked as full-term recurring revenue. When global AI valuations set the mood for Indian rounds, that scepticism is a competitive advantage.
FAQ
What is the difference between ARR and CARR?
ARR is annual recurring revenue from customers actively paying for a deployed product. CARR, or contracted ARR, includes signed deals not yet implemented. The report says CARR can run 70% higher than real ARR, which is why presenting one as the other misleads investors and acquirers about a startup's true health.
Why do venture capitalists allow this?
Inflated revenue helps a portfolio company look like a market leader, attracting press, talent and customers while supporting higher valuations on which VCs themselves are judged. As Celesta Capital's Michael Marks noted, richer valuations strengthen the incentive to stretch the numbers.
Does this affect Indian startups?
Yes. India's AI and SaaS startups raise against the same global benchmarks, and SEBI now demands clearer KPI and valuation disclosure from new-age firms heading for a listing. Inflated private metrics become a serious liability once a company faces public-market scrutiny.
Where can I read the original report?
TechCrunch published the full investigation by Marina Temkin on 22 May 2026. It carries on-record comments from founders and investors across legal and health AI, including Spellbook's Scott Stevenson, and details the specific accounting tactics used to inflate recurring revenue figures.
This story was reported by TechCrunch. Read the full original coverage at TechCrunch.