The AI investment boom (or perhaps bubble) is something Silicon Valley has experienced many times before: a gold rush of venture capital money thrown at the big new thing. But one aspect is completely unique at that time: startups go from $0 to $100 million in annual recurring revenue, sometimes in a few months.
Rumor has it that many venture capitalists won’t even be interested in a startup that isn’t on the ARR highway, aiming for $100 million in ARR ahead of their Series A financing cycle.
But Jennifer Li, general partner at Andreessen Horowitz, who helps oversee many of the firm’s most prominent AI companies, cautions that some of the ARR mania is based on myths.
“All ARR is not created equal, and not all growth is equal either. » Li said in an episode of TechCrunch’s Equity podcast. She said she was particularly skeptical of a founder announcing dramatic ARR numbers or growth in a tweet.
There is now a legitimate and well-recognized term in accounting called annual recurring revenue, which refers to the annualized value of contracted recurring subscription revenue. Essentially, this is a guaranteed revenue level because it comes from contracted customers.
But what many of these founders are tweeting about is actually “revenue run rate”: taking all the money paid out over a given period of time and annualizing it. It’s not the same.
“There’s a lot of nuance missing when it comes to quality, retention and business sustainability in this conversation,” Li warned.
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A founder may have just had a stellar month of sales, but that month won’t necessarily repeat itself every month. Or, a startup may have many short-term customers participating in pilot programs, so revenue is not guaranteed after the pilot period.
Normally, such boasts about growth via tweets should be treated for what they are, i.e. don’t take everything you read on the Internet at face value.
But because rapid growth is a hallmark of AI startups, such claims “introduce a lot of anxiety” to inexperienced founders who now wonder how they can also go from zero to $100 million instantly, she said.
Li’s answer: “No. Of course, it’s a big aspiration, but you don’t have to build a business that way, to only optimize for top-line growth.”
She said a better way to think about it is: how to grow sustainably, where once customers sign up, they stay and increase their spending with your business. This can lead to “5 or 10 times growth per year,” Li said, meaning growth from $1 million to between $5 million and $10 million in the first year, to between $25 million and $50 million in the second year, and so on.
Li stressed that these are still “unprecedented” levels of growth. If this is accompanied by satisfied customers, i.e. high retention rates, these startups will find investors willing to back them.
Of course, some of the portfolio companies in Li’s a16z group (the infrastructure team) have achieved these kinds of racing ARR numbers: Cursor, ElevenLabs, and Fal.ai. But this growth is linked to “sustainable businesses,” Li said, adding: “There are real reasons behind each of them. »
Li also said this type of growth comes with its own set of operational issues, like recruiting.
“How do you hire, not quickly, but the right people who can really jump into that type of speed and culture,” she said. And the answer is: not easily.
This means that these first 100 people wear many hats and missteps are inevitable. Last year, Cursor, for example, angered its customers with a poorly deployed price change.
Li pointed out that other fast-growing startups are dealing with legal and compliance issues before they have systems in place to do so, or are facing new issues related to the AI era, such as combating deepfakes.
So while super-rapid growth can be a good problem, it’s also a bit “be careful what you wish for.”
Listen to the full episode here:
