The AI investment boom (or maybe 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 totally unique in these times: startups skyrocket from $0 to $100 million in annual recurring revenue, sometimes within months.
The street is that many VCs won’t even look at a startup that isn’t on the ARR highway, targeting $100M 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 firms, cautions that some of the ARR frenzy is based on myth.
“Not all ARR is equal, and not all growth is equal,” Li said on an episode of TechCrunch’s Equity podcast. She said she was especially skeptical of a founder announcing spectacular ARR numbers or growth in a tweet.
Now, there is a legitimate, well-recognized term in accounting called annualized recurring revenue, which refers to the annualized value of contractual, recurring subscription revenue. Essentially, this is a guaranteed level of revenue because it comes from contract customers.
But what many of these founders are tweeting about is really the “revenue run rate” — taking how much money was paid in over a period of time and annualizing it. It’s not the same.
“There are many nuances of business quality, retention and resilience that are missing from this discussion,” Li warned.
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A founder may have just had a killer month of sales, but they won’t necessarily repeat it every month. Or a startup might have a lot of short-term customers doing pilots, so the revenue isn’t guaranteed to stick around after the pilot period.
Normally, such bragging about growth via tweets should be taken for what it is — that is, don’t take everything you read online at face value.
But because rapid growth is a hallmark of AI startups, such claims “create a lot of anxiety” for inexperienced founders who are now asking how they can also go from zero to $100 million instantly, he said.
Li’s response: “You don’t. Sure, it’s a big ambition, but you don’t have to build a business that way to optimize only for top-line growth.”
He said a better way to think about it is this: how to grow sustainably, where once customers sign up, they stay and extend their spending with your company. That can lead to “a 5x or 10x increase year over year,” Li said, meaning an increase from $1 million to $5 to $10 million in the first year, to $25 to $50 million in the second year, and so on.
Lee pointed out that this is still “unheard of” levels of growth. If combined 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 Li’s a16z group (the infrastructure group) have achieved these types of competitive ARR numbers: Cursor, ElevenLabs, and Fal.ai. But that growth is linked to “enduring business,” Lee said, adding, “There are real reasons behind each of them.”
Lee also said that type of development comes with its own set of operational problems such as recruitment.
“How do we hire, not fast, but the right people who can really jump into that kind of speed and culture,” he said. And the answer is: not easily.
That means those first 100 people are wearing many hats and mistakes are bound to happen. Last year, Cursor, for example, angered its customer base with a poorly developed price change.
Li pointed out that other fast-growing startups are dealing with legal and compliance issues before building systems or tackling new issues of the AI age, such as dealing with deepfakes.
So while Blitz might be a good problem to have, it’s also a bit ‘be careful what you wish for’.
Listen to the full episode here:
