Scott Stevenson, founder and CEO of Spellbook, said many AI startups are inflating their real revenues to attract venture capital funding [1].

This practice creates a distorted view of the AI sector's health, potentially leading to overvaluation of companies that lack sustainable business models. If investors cannot distinguish between realized revenue and future promises, the industry risk a market correction.

Stevenson said it is time to expose a "huge scam in AI startups: Contracted ARR" [1]. He explained that companies are blurring the lines between Annual Recurring Revenue (ARR) and future contract revenue to make their growth trajectory appear more aggressive than it is [1].

According to Stevenson, this inflation occurs when startups treat future contract revenue as if it already exists in the bank. This allows them to present a higher valuation based on a metric that does not reflect actual cash flow [1].

Industry analysts have noted that seed-stage AI startups are flashing record revenue numbers, but most of these figures are not what they seem [2]. The pressure to secure funding in a competitive environment pushes founders to use these misleading metrics to win the attention of venture capitalists [1].

Stevenson's warning serves as a reminder that the AI boom has created an unprecedented level of pressure on startups to show rapid growth. By redefining the AI revenue model, startups are essentially betting on future payments that may never materialize, allowing them to raise capital based on projected rather than realized gains [1].

“It’s time to expose a huge scam in AI startups: Contracted ARR”

The shift toward 'Contracted ARR' as a reported metric signals a systemic risk in the AI investment landscape. By blending future projections with realized revenue, the industry is creating an artificial inflation of success. This creates a gap between perceived value and actual fiscal health, which could lead to a larger bubble if venture capitalists fail to apply stricter due diligence on how these revenue numbers are calculated.