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 completely unique for this time: startups rocketing from $0 to $100 million in annual recurring revenue, sometimes in a few months.
Word on the street is that many VCs won’t look at startups that aren’t on the ARR highway, targeting $100 million in ARR before Series A funding round.
But Andreessen Horowitz general partner Jennifer Li, who helps oversee many of the firm’s most important AI ventures, cautions that some of the ARR mania is based on myth.
“Not all ARRs are created equal, and not all growth is equal,” Li spoke on an episode of TechCrunch’s Equity podcast. He said he was skeptical about founders announcing spectacular ARR numbers or growth in tweets.
Currently, there is a legitimate and well-known term in accounting called annual recurring revenue, which refers to the annual value of the contracted, recurring subscription revenue. In essence, this is a guaranteed level of revenue as it comes from customers under contract.
But what many founders are tweeting about is really “revenue run rate” – taking whatever money has been paid in time and annualizing it. That is not the same.
“There are a lot of nuances of business quality, retention, and resilience that are lost in that conversation,” Li said.
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A founder just had a month of killer sales, but not every month should repeat. Or a startup might have a lot of short-term customers doing a pilot program, so the revenue isn’t guaranteed to stick around after the pilot period.
Usually, bragging about growth via tweets should be taken for what it is – that is, don’t take everything you read on the internet at face value.
But because rapid growth is a hallmark of AI startups, the statement “introduces a lot of anxiety” to inexperienced founders who are now asking how they can go from zero to $100 million in a flash, he said.
Li’s answer: “You don’t. Of course, it’s a good aspiration, but you don’t have to build a business like that, just to maximize the highest growth.
He says that a better way to think about it is: how to grow sustainably, when customers sign up, they stay and expand their spending with your company. This can lead to “5x or 10x year-over-year growth,” 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, etc.
Li stated that this is still an “unheard of” growth rate. If it is associated with happy customers – that is, a high retention rate – the startup will find investors who want to support it.
Of course, some of the portfolio companies in Li’s a16z group (infrastructure team) have achieved those race ARR numbers: Kursor, ElevenLabs, and Fal.ai. But the growth is related to “long-lasting business,” Li said, adding, “There is a real reason behind everyone.”
Li also said that this type of growth has its own operational issues such as rent.
“How do we hire, not fast, but the right people who can jump into this type of speed and culture,” he said. And the answer is: it’s not easy.
That means the first 100 people wearing a lot of hats and missteps will happen. Last year, Cursor, for example, angered its customer base with less price changes launched.
Li points out that other fast-growing startups are dealing with legal and compliance issues before they have systems in place, or face new AI-age issues like fighting deepfakes.
So, while growing fast can be a good thing, it’s also “be careful what you wish for.”
Listen to the full episode here: