a16z VC wants startups to stop stressing over crazy ARR numbers

The AI ​​​​investing boom (or maybe bubble) is something Silicon Valley has seen many times in the past: a gold rush of VC money thrown at the Big New Thing. But one side of it is very different from these times: startups ranging from $0 to $100 million in annual recurring revenue, sometimes in a few months.

Word on the street is that most VCs will no longer look at startups that aren’t on a high ARR path, they want $100 million in ARR before their Series A round money cycle.

But Andreessen Horowitz senior partner Jennifer Li⁠, who helps oversee many of the world’s most important AI companies, cautions that some of ARR’s mania is based on myth.

“Not all ARRs are created equal, and not all growth is the same,” Li said on an episode of TechCrunch’s Equity podcast. He said that he is especially suspicious of a startup announcing impressive ARR numbers or tweet size.

Now, there is an official, well-known term in accounting called annual recurring revenue, which refers to the annual cost of recurring, recurring revenue. Basically, the money is guaranteed because it comes from the customers on the contract.

But what many of these founders are tweeting about is “funding” – taking whatever money has been paid for a while and processing it. They are not the same.

“There are many missing elements of business, security, and resilience that are not in the discussion,” Li warned.

A startup can have a killer sales month, but not every month will repeat itself. Or startups may have many short-term customers doing pilot programs, so revenue cannot be guaranteed to last beyond the pilot period.

In general, such bragging about growth via tweets should be treated as is – that is, don’t take everything you read on the internet for granted.

But because rapid growth is a hallmark of AI startups, such claims are “creating a lot of anxiety” for inexperienced startups who are now asking how they can go from zero to $100 million, he said.

Li’s answer: “You don’t. Sure, it’s a big ambition, but you don’t have to do business that way, just to achieve top line growth.”

He said the best way to think about it is this: the more you grow, the more customers you sign up for, the more money they spend with your company. This would lead to “5x or 10x growth year over year,” said Li, meaning growth from $1 million to between $5 million and $10 million in one year, to between $25 million and $50 million in the second year, and so on.

Li said that this was not a “reasonable” development. If combined with happy customers – that is, high retention rates – the startups will find investors to back them.

Of course, some of the companies in Li’s a16z group (architecture group) have hit these ARR-type 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 that this kind of growth comes with its own operational challenges such as hiring.

“How do we hire, not fast, but the right people who can jump into this kind of speed and culture,” he said. And the answer is: not easily.

This means that the first 100 people wear many hats and mistakes are bound to happen. Last year, Cursor, for example, pissed off its customers and price changes that did not go well.

Li noted that some fast-growing startups face regulatory and compliance issues before they have systems in place, or face age-old AI challenges such as deep computing.

So while lightning fast growth may be a nice problem to have, it’s a bit of a “be careful what you wish for.”

Listen to the full episode here: