An investigation published in TechCrunch In May 2026, a widespread practice among AI startups came to light: the use of deliberately inflated ARR (Annual Recurring Revenue) metrics to build compelling growth narratives. Investors, often aware of the artifice, still play along. The result is an ecosystem where public numbers reflect aspirations more than operational realities.
Therefore, for Italian SMEs considering adopting AI tools—whether as clients or business partners—this dynamic represents a concrete risk. Relying on a vendor based on inflated ARR means building digital strategies on unstable foundations. Furthermore, the consequences can be significant: multi-year contracts with platforms that cannot sustain growth, costly integrations with technologies destined for downsizing, and budgets depleted by unfulfilled promises.
At SHM Studio, we constantly monitor the evolution of the AI market to offer B2B SMEs a critical and operational perspective. In this analysis, we explain how the inflated ARR mechanism works, what warning signs to look for, and how to build more solid evaluation criteria when choosing a technology provider in 2026.
The context: why ARR has become the emblematic metric of AI
In recent years, Annual Recurring Revenue has become the most cited number in tech startup pitch decks. In the AI sector, however, this metric has taken on a disproportionate weight. Investors and the media use it as a proxy for company health. Therefore, those who control it control the narrative.
The problem is structural. ARR was created to measure recurring and predictable revenue, typical of SaaS models with clear annual contracts. However, many AI startups operate with hybrid models: usage-based pricing, pilot contracts, revenue share, prepaid credits. These flows are not necessarily recurring. Yet, they are annualized and presented as ARR.
According to an analysis published by TechCrunch on May 22, 2026, some founders and their investors are fully aware of this distortion. In certain cases, the practice is deliberate. The goal is to build narrative momentum to attract subsequent rounds or enterprise clients.
The numbers that count: how to inflate ARR
There are at least four recurring techniques for artificially inflating ARR. Knowing them helps you read press releases with a more critical eye.
- Annualization of pilot contracts: A 50,000 euro contract over six months is presented as 100,000 euros ARR, even though renewal is not guaranteed.
- Inclusion of non-recurring revenue: One-time implementation, training, or consulting services are added to recurring revenue.
- LOI and MOU Count: Some startups include letters of intent or non-binding memoranda as if they were signed contracts.
- Forward-looking projections The number published does not reflect the present, but a projection based on expected pipelines or expansions.
Furthermore, the competitive landscape amplifies these behaviors. When a competing startup announces record ARR, the pressure to respond with similar numbers becomes immense. Consequently, a spiral is triggered wherein metrics progressively diverge from operational reality.
Research by Gartner on AI Adoption in the Enterprise Market highlight how the lack of standardization in revenue metrics is one of the main obstacles to a reliable evaluation of technology providers.
Strategic Reading: Who wins and who loses in this game
The mechanism of inflated ARR is not neutral. It produces well-defined winners and losers. Therefore, it is worth analyzing precisely.
The winners in the short term These are the founders who manage to close rounds at high valuations before the market corrects. They are also the VCs who get in early and exit before the correction. Finally, they are the PR agencies that build compelling growth narratives based on unverified numbers.
Structural losers Instead, it's the client companies — with SMEs at the forefront — that sign multi-year contracts with overvalued suppliers. It's also the startup employees who see stock options collapse on inflated valuations. Likewise, it's retail investors who enter late, when the bubble has already formed.
Related articles
Discover other articles that explore similar topics in depth, selected to give you a more complete and stimulating view. Each piece of content is carefully chosen to enrich your experience.
