Spellbook CEO calls out 'CARRGATE': how AI companies are inflating ARR by 3–5x with contracted revenue tricks
Key Points
- Spellbook CEO Scott Stevenson calls out systematic inflation of ARR across enterprise AI companies, with contracted revenue figures inflated 3–5x higher than actual live billings.
- Companies are gaming metrics by reporting step-up contracts at full price, burying opt-out clauses in long-term deals, and counting undelivered features and unconverted pilots as current revenue.
- The distortion harms employees making equity decisions and customers assessing vendor maturity, while Stevenson pushes journalists to stop treating contracted ARR as equivalent to actual collections.
Summary
Read full transcript →CARRGATE: How AI Companies Are Inflating ARR by 3–5x
Scott Stevenson, co-founder and CEO of Spellbook, an AI contract review platform with 4,400 customers across 80 countries, is calling out what he terms "CARRGATE" — a systematic inflation of revenue metrics that he says has made ARR figures at many enterprise AI companies functionally meaningless.
The core mechanism is contracted ARR, or CARR, a metric that lets companies count revenue not yet collected. Used conservatively, it has legitimate applications, such as crediting a deal during a nine-month implementation before billing goes live. The problem, Stevenson says, is that it has been stretched far beyond that original purpose.
“I have literal examples, confirmed examples of the press number being three to five times higher than the actual live ARR number. Company signs three year enterprise deals — year one discounted at $1M, year three full price — they report $3M as ARR even though they're only collecting $1M. The customer has an opt-out option at twelve months. It's not actually a three year contract.”
How the gaming works
Stevenson lays out several patterns he says he's confirmed directly:
- Step-up contracts reported at full price. A customer signs a three-year deal at $1M in year one, $2M in year two, and $3M in year three. The company reports $3M as current ARR, even though only $1M is being collected.
- Opt-out clauses buried in long-term deals. The same customer has a twelve-month opt-out, meaning the three-year commitment is effectively fictional. The company still reports the back-year numbers as live.
- Undelivered feature commitments counted as ARR. A company promises a customer it will build a feature before billing begins, then reports the deal as ARR upfront — even if the feature hasn't shipped and billing hasn't started.
- Unconverted pilots reported as ARR. Three-month free pilots that haven't converted to paying customers are booked as ARR. Stevenson says an investor he spoke with sees this constantly from early-stage companies out of accelerators claiming $1M ARR that is entirely unconverted pilots.
The cumulative effect is significant. Stevenson says he has confirmed examples where the headline CARR figure being reported to press is three to five times higher than the actual live ARR number sitting in board decks.
Who gets hurt
Sophisticated investors typically see both numbers. Board decks, Stevenson says, usually show live ARR alongside CARR — it's only in press releases and media coverage that the inflated figure appears without qualification. That doesn't make it harmless.
Employees joining high-growth startups often make compensation and equity decisions based on headline revenue figures. If a company is publicly reporting $50M CARR but generating $10M in live ARR, and a prospective hire values their equity against the $50M number, the gap is material. Customers trying to assess which vendors are most mature face the same distortion. And once one company in a category starts reporting on CARR, competitors feel pressure to match the metric or look inferior by comparison.
What responsible reporting looks like
Stevenson's standard is straightforward: ARR should reflect revenue from customers who are actively being billed and actually paying. Annualizing the most recent month of live billings is defensible. Crediting deals that are signed but not yet live, especially when subject to opt-outs or unmet feature commitments, is not.
He stops short of calling for a specific industry-wide fix, but says his goal with going public on this is to get journalists to ask harder questions before printing ARR headlines. Several reporters who contacted him after his tweet said they would start asking companies to distinguish between live ARR and long-term committed figures before publishing.
Stevenson's near-term ask is modest: stop using CARR as a proxy for ARR in public communications, treat it as an internal projection tool at most, and let actual billings be the number that gets reported.
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