The AI investment boom (or maybe bubble) is something Silicon Valley has experienced many times before: a gold rush of VC money thrown at the big new thing. But one aspect of it is quite unique these days: startups skyrocket from $0 to as much as $100 million in annual recurring revenue, sometimes in a matter of months.
Word on the street is that many virtual providers won’t even look at a startup that isn’t on the ARR superhighway that’s aiming for $100 million in ARR ahead of its Series A funding round.
But Andreessen Horowitz general partner Jennifer Li, who helps oversee many of the top AI companies, cautions that some of the ARR mania is based on myth.
“Not all ARRs are the same and not all growth is the same,” Li said on an episode of TechCrunch’s Equity podcast. She said she’s especially skeptical of a founder tweeting spectacular ARR numbers or growth.
There is now a legitimate, well-known concept in accounting called annual recurring revenue, which refers to the annual value of contracted, recurring subscription revenue. Essentially, this is a guaranteed level of income as it comes from customers under contract.
But what many of these founders are tweeting about is actually a “rate of return” – they take all the money that has been paid in a certain period of time and roll it over a year. That’s not the same thing.
“There are many nuances of quality, preservation and durability of the business that are missing from this conversation,” Li warned.
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A founder may have just had a killer month of sales, but not every month is necessarily a repeat. Or, a startup may have many short-term customers doing pilots, so there’s no guarantee that sales will be sustained after the pilot period ends.
Normally, such growth bragging via tweets should be taken at face value – meaning don’t take everything you read on the internet at face value.
But because rapid growth is the hallmark of AI startups, such claims “cause a lot of anxiety” for inexperienced founders who are now wondering how they can also go from zero to $100 million in an instant, she said.
Li’s response: “No. Sure, it’s a great aspiration, but you don’t have to build a business this way to optimize only top-line growth.”
She said a better way to think about it is this: how to grow sustainably, where once customers sign up, they stay and expand their spending with your company. That can lead to “5x or 10x year-over-year growth,” Li said, which means growing from $1 million to $5 million to $10 million in the first year, to $25 million to $50 million in the second year, and so on.
Li pointed out that this is still an “unheard of” level of growth. If it’s coupled with happy customers – i.e. high retention rates – these startups will find investors willing to back them.
Of course, some of the portfolio companies in the Li a16z group (infrastructure team) have achieved these kinds of racing ARR numbers: Cursor, ElevenLabs, and Fal.ai. But this growth is linked to “sustainable business,” Li said, adding: “There are real reasons behind each of them.
Li also said this kind of growth comes with its own set of operational challenges, such as recruiting.
“How do we hire not fast, but the right people who can really jump into this type of speed and culture,” she said. And the answer is: not easily.
That means those first 100 people wear a lot of hats and missteps are bound to happen. Last year, for example, Cursor angered its customer base with a poorly implemented pricing change.
Li pointed out that other high-growth startups are dealing with legal and compliance issues before they have systems in place or face new AI challenges such as combating deepfakes.
So while the flash growth might be a good problem, it’s also a bit of a “be careful what you wish for” thing.
Listen to the full episode here: