Cluely CEO Roy Lee told a TechCrunch reporter that his company’s annual recurring revenue had doubled in one week to $7 million. He later retracted the claim on X, writing that he “got a random cold call from some woman asking about numbers and told her some BS.” The actual figure, according to Lee’s own correction: $5.2 million. Cluely is an Andreessen Horowitz-backed startup whose motto is “Cheat on everything.”
The admission, first reported by Bloomberg on April 7, has triggered a broader conversation about ARR’s reliability as the default metric for evaluating AI startup growth. ARR takes one month’s revenue from recurring contracts and multiplies by 12. The calculation is simple. The problem is that nobody agrees on what counts as “recurring.”
No Auditor, No Definition, No Cop
“The startup world has always been a bit more of a Wild West,” Chuck Eesley, a professor of management science and engineering at Stanford University, told Bloomberg. “There are no audit requirements, there are no SEC definitions, so basically there’s no cop on the beat other than the VCs and acquirers doing their due diligence. So essentially, the number can mean whatever the founder needs it to mean when they walk in to do a deal or do a fundraise.”
The issue is compounded by how AI startups generate revenue. Traditional SaaS companies sold predictable subscriptions. AI companies increasingly charge based on usage, creating lumpy revenue patterns that resist annualization. “Customers may have a nominal subscription number but are paying mostly for usage,” Darren Yee, a senior venture associate at NYU’s Innovation Venture Fund, told Bloomberg. “You can’t just take one month of subscriptions and multiply by 12 and get what that represents in an annual contract, because it probably won’t play out that way.”
Trial Revenue That Vanishes
Eesley pointed to another distortion specific to the current AI cycle: enterprise experimentation budgets. Companies eager to try AI tools sign up, use them during trial periods, then drop them. That trial revenue technically qualifies as “recurring” while the contract is active, even if renewal rates are low. “A lot of companies want to experiment with AI these days because they recognize that it’s a big trend,” Eesley told the Economic Times. “There’s a lot of budget there for experimentation, but not all of those experiments pan out into actual recurring revenue.”
Lee himself doesn’t think ARR works for early-stage AI companies. In an expletive-laden email to Bloomberg, he wrote: “What the f--- even is ARR for a company that is less than a year old? The calculation doesn’t even make f---ing sense for us, it’s a fake accounting number developed by fake accounting people.” He added that his measurement of the metric was changing 20% week to week.
The Audit Dilemma
The obvious fix, stricter auditing, may create its own problems. “I think we should be careful about imposing a lot of auditing and accounting costs on small startups and stifling a lot of the innovation and experimentation that should be going on,” Eesley told the Los Angeles Times.
Chris Sloan, co-chair of Baker Donelson’s emerging companies group, offered a simpler alternative: transparency. “Always err on the side of disclosing too much rather than too little,” Sloan told Bloomberg. “If you have broken trust with a potential investor, you’re never getting that back.”
The Due Diligence Gap
The Cluely incident is one founder’s brazen admission. The structural problem is larger. Companies reporting ARR for individual products or overall sales include Anthropic, Glean, and Cursor, according to Bloomberg. OpenAI’s product-level recurring revenue has become a closely watched figure across media outlets. None of these numbers are audited. None use standardized definitions.
For investors writing checks into AI startups based on ARR multiples, the question is straightforward: if the canonical metric for startup valuation can mean whatever the founder needs it to mean, what exactly are you underwriting?