A practice in which AI startups promote annual recurring revenue (ARR) figures inflated above actual revenue has come under scrutiny.

Scott Stevenson (스콧 스티븐슨), co-founder and CEO of legal AI startup Spellbook, said on social media platform X (Twitter) on April 17 that many AI startups set revenue records because they use dishonest metrics.

He gave an example of a company signing a three-year enterprise contract with tiered pricing of $1 million in the first year, $2 million in the second year and $3 million in the third year.

Stevenson said that although the amount being received is $1 million, many companies announce the third-year amount of $3 million as ARR. He added that because an opt-out clause allows customers to terminate the contract at the 12-month point, it is effectively not a firm three-year contract.

Calculated this way, when a company's actual cash-generating ARR is about $35 million, it can promote about $100 million in ARR externally. That is an inflated figure of about three times.

He said some enterprise AI companies include on-site deployment engineers in contracts, resulting in negative margins in the first year. He also said that if customers actually exercise opt-out clauses or begin aggressively negotiating third-year pricing, enterprise AI companies could collapse in a chain reaction.