The moment GMV is labeled ARR, the business is built on sand

Summary

— The moment GMV is labeled Annual Recurring Revenue, the business is built on sand In recent feeds and headlines covering AI startups, a certain phrase repeats with exhausting frequency: "Reached $X million ARR in just n months." At first, it is impressive. The second time, it invites skepticism. By the third, one inevitably arrives at the question: "Is that actually ARR?" This is not merely a matter of accounting tricks or semantic hair-splitting. It is a fundamental question about the structure of AI businesses, their sustainability, and how we ought to interpret the numbers presented to us. What ARR Actually Is — A Concept Strict in its Simplicity ARR stands for Annual Recurring Revenue. The two operative words here carry weight. Annual: A full year must effectively elapse or be contractually guaranteed. Recurring: The revenue must be structurally proven to repeat, not merely happen by chance. Therefore, ARR is not: "Last month's revenue × 12" "This month's usage annualized" These are run-rates. ARR is not a prediction; it is a result verified by time. Fundamentally, For a company less than a year old to claim ARR is, conceptually, a contradiction. The year has not passed. The recurrence has not been proven. Yet Everyone Speaks in ARR. Why? The reason is simple. ARR is the lingua franca of SaaS. And the language of SaaS invariably connotes: Stability Predictability High Valuation Multiples Thus, many AI companies, even those far from reaching that stage, borrow the term ARR to describe their finances. The problem begins exactly there. The Real Numbers of AI Startups — Closer to GMV than ARR Peer slightly beneath the surface of many AI startup revenue structures, and a pattern emerges. A significant portion of what the customer pays Flows immediately out the door. For instance: LLM API costs GPU and compute expenses Costs for external human-in-the-loop contractors In this structure, the portion the company actually retains is but a fraction of the total payment. ...