The AI investing boom (or perhaps bubble) is something Silicon Valley has seen many times before: a gold rush of VC money thrown at the Big New Thing. But one aspect of it is completely unique to these times: startups rocketing 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 a VC won’t even look at a startup that’s not on the ARR superhighway, aiming for $100 million in ARR before their Series A funding round.
But Andreessen Horowitz general partner Jennifer Li, who helps oversee many of the firm’s most important AI companies, warns that some of the ARR mania is based on myths.
“Not all ARR is created equal, and not all growth is equal either,” Li said on an episode of TechCrunch’s Equity podcast. She said to be especially skeptical of a founder announcing spectacular ARR numbers or growth in a tweet.
Now, there is a legit, well-recognized term in accounting called annual recurring revenue, which refers to the annualized value of contracted, recurring subscription revenue. Essentially, that’s a guaranteed level of revenue because it comes from customers on a contract.
But what many of these founders are tweeting about is really “revenue run rate” — taking whatever money was paid in a period of time and annualizing it. That’s not the same.
“There’s a lot of missing nuances of the business quality, retention, and durability that’s missing in that conversation,” Li warned.
A founder may have just had a killer month of sales, but not every month will necessarily repeat it. Or a startup may have a lot of short-term customers doing pilot programs, so revenue isn’t guaranteed to stick around after the pilot period.
Normally, such boasts about growth via tweets should be treated for what they are — that is, don’t take everything you read on the internet at face value.
But because fast growth is a hallmark of AI startups, such claims are “introducing a lot of anxiety” to inexperienced founders who are now asking how they can also instantly go from zero to $100 million, she said.
Li’s answer: “You don’t. Sure, it’s a great aspiration, but you don’t have to build a business that way, to only optimize for the top-line growth.”
She said a better way to think of it is this: how to grow sustainably, where once customers sign up, they stick around and expand their spend with your company. This can lead to “growing 5x or 10x year-over-year,” said Li, meaning growth from $1 million to between $5 million and $10 million in year one, to between $25 million and $50 million in year two, and so on.
Li pointed out that this is still “unheard of” levels of growth. If it’s coupled with happy customers — that is, high retention rates — those startups will find investors willing to back them.
Of course, some of the portfolio companies in Li’s a16z group (the infrastructure team) have hit those kinds of racing ARR numbers: Cursor, ElevenLabs, and Fal.ai. But that growth is tied to “durable businesses,” said Li, adding, “There’s real reasons behind each of them.”
Li also said that kind of growth comes with its own set of operational problems like hiring.
“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, Cursor, for instance, angered its customer base with a poorly rolled out pricing change.
Li pointed out that other fast-growth startups deal with legal and compliance issues before they have systems in place to, or face new AI-age issues like countering deepfakes.
So while lightning-fast growth can be a good problem to have, it’s also a little bit of “be careful what you wish for.”
Listen to the full episode here:
