Silicon Valley AI startups rampant sales inflation

(San Francisco = Yonhap News) Correspondent Kwon Young-jeon = The practice of inflating sales to attract investment has been found to be widespread among artificial intelligence (AI) startups in Silicon Valley.

US economic media Business Insider reported on the 8th (local time) that 'sales inflation', in which AI startups arbitrarily interpret or distort sales indicators, is prevalent.

The indicators that are key criteria for evaluating the value of startup companies and attracting investment are Annual Recurring Revenue (ARR) and Annualized Sales (Run Rate), but some startups are confusing investors by mixing the two or blurring the boundaries between the two.

Annual recurring revenue is an indicator that has been used in the software service (SaaS) field and refers to subscription sales that can be secured stably every year based on annual or multi-year contracts actually signed with customers.

On the other hand, annualized sales are calculated by simply multiplying the performance for a specific month by 12.

Recently, AI companies often use annualized sales because they charge pay-as-you-go fees based on usage, such as tokens or usage time, rather than charging a monthly subscription fee.

For example, in the case of Open AI, recurring sales can be calculated from the ChatGPT subscription fee, which has a fixed monthly fee for individual customers, but recurring sales cannot be calculated from sales from application programming interface (API) pay-as-you-go fees or advertising business sales, which are mainly used by corporate and developer customers.

Some startups are increasingly taking advantage of this to give distorted signals by announcing annualized sales based on the sales of the month in which they showed so-called 'sparkling sales'.

In particular, there are cases where some startups announce annual recurring sales as the estimated figure by adding up all temporary token sales, commissions, and one-time equipment sales sales that are not normally considered recurring sales.

For this reason, venture capitalists point out that the phenomenon of ‘recurring sales’ not being repeated is occurring.

There were even cases where performance that was completely untrue was revealed to the public.

Roy Lee, CEO of AI startup Cluley, announced to the media last year that his company's annual recurring revenue was $7 million (about 9.4 billion won), but when controversy arose, he admitted eight months later that he had made a "blatantly dishonest" statement and that the actual figure was $5.2 million.

However, investors say that when startup representatives are asked about figures that appear to be exaggerated, they often make lame excuses, saying, "Everyone else does it that way."

Since unlisted startups are rarely audited or monitored by regulatory authorities, there are not many ways to filter out such distorted announcements.

In the venture investment industry, there are self-deprecations and warnings that such unethical behavior by startups is the same as the market situation at the end of 2021 when the venture bubble reached its peak.

Shruti Gandhi, general partner at Array Ventures, said, “This is a time of inflation in annual recurring sales,” and pointed out, “There is no sense of responsibility in the current market.”