Buckle up, because someone finally said the quiet part loud. Scott Stevenson, cofounder and CEO of legal AI startup Spellbook, dropped a viral tweet on April 17 calling out what he describes as a "huge scam" running rampant through the AI startup ecosystem. And honestly? It tracks.
The trick hiding in plain sight
Here is the short version: loads of AI startups are reportedly inflating a key revenue metric called ARR (Annual Recurring Revenue) to make their numbers look absolutely mouthwatering to venture capitalists. The method? Reporting "contracted ARR" instead of actual earned revenue.
The difference matters enormously. Real ARR reflects money that has actually come in. Contracted ARR counts deals that are signed but not yet paid, or revenue that is contingent on things actually... working out. It is the financial equivalent of counting your chickens before they hatch, then presenting those imaginary chickens to investors as a thriving poultry empire.
Why VCs are (allegedly) falling for it
Thousands of AI startups are currently elbowing each other in the face trying to grab enterprise market share and the VC dollars that come with it. When competition is this fierce and everyone is screaming about record growth, there is enormous pressure to show numbers that pop. Contracted ARR conveniently does that job.
According to Fast Company's reporting on Stevenson's callout, the practice has become widespread enough that he felt compelled to go public about it. Which, in a world where founders usually protect the vibe at all costs, is genuinely notable.
Why this actually matters beyond the drama
This is not just spicy founder beef. When revenue metrics get gamed, it distorts which companies attract capital, which ones grow, and ultimately which AI tools end up shaping industries like law, finance, and healthcare. Bad money chasing inflated numbers means real innovation can get crowded out by companies that are better at spreadsheet theatre than building products.
Stevenson runs a legal AI startup, so he is operating in exactly the kind of high-stakes enterprise space where these metrics get scrutinized, and apparently, stretched. His willingness to name the practice as a scam is either admirably principled or an extremely savvy PR move. Possibly both.
Either way, the next time an AI startup announces it is "crushing revenue records," maybe ask a follow-up question or two.
