An investigation published on TechCrunch in May 2026 brought to light a common practice among AI startups: the use of deliberately inflated ARR (Annual Recurring Revenue) metrics to build convincing 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 customers 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 can't sustain growth, costly integrations with technologies destined to be scaled back, and budgets burned on 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 symbolic 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 disproportionate weight. Investors and the media use it as a proxy for company health. Therefore, whoever controls it controls 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 some cases, the practice is deliberate. The goal is to build narrative momentum to attract subsequent rounds or enterprise clients.
The numbers that matter: how an ARR gets inflated
There are at least four recurring techniques to artificially inflate ARR. Knowing them helps to read press releases with a more critical eye.
- Annualizing pilot contracts: a 50,000 euro contract over six months is presented as 100,000 euro ARR, even though renewal is not guaranteed.
- Inclusion of non-recurring revenue: one-off implementation, training, or consulting services are added to recurring revenue.
- Counting of LOIs and MOUs: some startups include non-binding letters of intent or memorandums as if they were signed contracts.
- Forward-looking projections: the published number does not reflect the present, but a projection based on pipeline or expected 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 where metrics progressively drift away from operational reality.
Research of Gartner on AI adoption in the enterprise market highlight how the lack of standardization in revenue metrics is one of the main obstacles to reliably valuing technology providers.
Strategic reading: who wins and who loses in this game
The inflated ARR mechanism is not neutral. It produces well-defined winners and losers. Therefore, it is worth analyzing it with precision.
The short-term winners they are the founders who manage to close rounds at high valuations before the market corrects. They are also the VCs who enter early and exit before the correction. Finally, they are the PR agencies that build convincing growth narratives on unverifiable numbers.
The structural losers Instead, it's the client companies—SMEs in particular—that sign multi-year contracts with overvalued suppliers. It's also the startup employees who see their stock options plummet on inflated valuations. Likewise, it's the retail investors who jump in late, when the bubble has already formed.
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