Is ARR Becoming ‘Vibe Revenue’ in the AI Era?

When I talk to a lot of people about this 996, it's not because they're trying to keep up with customer demand. It's not like oh my God, we have to be in here on Saturday because we have so many support tickets to deal with them. It's, I think, a fear that everybody else is doing it and am I a loser if I'm not working on Saturday?

It's the week of September 29th welcome to the Learning Corner, a Precursor Ventures podcast.

Welcome to the Learning Corner by Precursor. I'm Mia Farnam and I'm joined by our GP and Managing Partner Charles Hudson, where we will be talking through articles and Goodreads that caught our team's attention over the past week. Our first topic is a piece from Fortune titled Founders are using Creative Accounting to Boost Lofty ARR, the hottest startup Metric in Silicon Valley. Author Ali Garfinkel dives into the historically deeply understood concept of ARR and what has become murkier about the metric in the recent years. In the early days of sas, ARR was a clear cut indicator. It was a measure of science stable reoccurring revenue readily accepted by VCs as a proxy for the startup's long term viability. Standardized contracts and annual pricing made the metric hard to manipulate. Most deals reflected real, lasting customer commitments, but as the AI gold rush has accelerated, the industry's trust in ARR has eroded. Founders face immense pressure to show revenue early, leading to creative interpretations. Pilots, short term trials, unactivated contracts and so called booked ARR. Yeah, are counted as if they were guaranteed long term income, even when customers can really just walk away at any time. So the metric is now less about actual reoccurring revenue and more about vive revenue as quoted in the article, or experimental revenue as we've talked about here on the podcast, really lacking the reliability it had in SaaS's prime. So there is an argument in the piece that bubbling valuations are tied to the growing murkiness of ARR. Essentially, the higher a company's ARR, the bigger its valuation can be. Nothing really revolutionary. It's kind of like how it's always worked, but really based on investor hopes for future liquidity which back up them wanting to give out those higher valuations. My question is, even if the current AI boom hadn't lifted all of Venture recently, do you think ARR would still have become as murky as it is today?

No, Yeah, I don't think so. I think in SaaS land we'd sort of Decided this is contracted revenue, this is activated revenue. It felt like, you know, from predictable revenue way back in the beginning of SaaS. Today we had pretty good conventions about what does revenue mean, what does bookings mean, what's recurring, what's non recurring, what's transactional. I feel like we'd sorted all of this out. And this is one of those cases where I am both sympathetic and terrified for the plight that founders face. And for me, the first time I really got a hint that something was different was 11x.

Yeah.

When the article came out and 11x was like, oh, we have all these annual contracts. And I was like, wait a minute, I thought we had settled this. That revenue isn't revenue when the customer has an easy opt out. If you're telling me that you signed a year long contract but the customer has a 90 day opt out, I'm like, well that 90 days is kind of a pilot exploratory phase. I wouldn't book that as revenue until the customer has left the period where they can opt out of the deal. And I think that worked for a while. And what I've seen is people getting progressively more aggressive. Everything from, well, we gave a bunch of our customers credits for future usage and we're going to count that as revenue. I'm like, well that's not revenue, that's like credits you gave them for future usage. If anything, that's more like a liability than revenue. And I understand why this is happening. It's because you read these blog posts about companies that have gone from zero to whatever in these impossibly short periods of time. And I think founders say, well that's the standard that I need to show in order to get attention from investors. And even there was a, like a sub conversation that, you know, the old triple, triple, double, double, which used to be really good performance. I was like, that doesn't matter anymore. That's not good enough. So I think all of the messages from VCs are like, if you don't look like lovable, if you don't look like Cursor or Replit, one of these companies that goes from nothing to something in a very compressed period of time, you don't matter. Yeah. And so I think the rational, albeit bad response for most founders is why to make my business look like that. And I've met people who've told me like all kinds of different things. So I never thought I'd have to spend this much time yet talk to people about what does that revenue number. You've told me what does it actually mean, first of all, is it even revenue? Is it money in from a customer, or is it something else? And then what are the terms? And I hope that this fever breaks soon because I think it doesn't help anybody to spend that much of a first introductory pitch meeting trying to sort through where is this company. Actually, the flip side is the companies that can make those claims and sell them raise really quickly. So there isn't always a lot of time as an investor to diligence. And if you're like, hey, I want to see all the contracts and I want to, like, understand, somebody else might just say, I'll take your word for it. So in some ways, you might be back to some of the bad habits of 2021.

It doesn't help that investors aren't spending time digging into it. And I don't, again, I don't blame investors to it all part of, like, the larger dynamic of everyone wanting to seek liquidity and typically ARR being a way to do risk if this company is going to provide liquidity in a shorter period of time. So if you told me you went from 0 to 7 million ARR in a week, I try to look through and find what that is. But if you're an investor and you're like, this is a time of competitive deals. If I spend too much time digging into this and this actually could be the next thing, why don't I just write it up at some crazy valuation to show support and then move on and hope that it all works out? We were just talking about this with one of our interns, Missy, going into kind of the loop of if you're a user of these different AI tools, it is fascinating. I've never been so disloyal as a subscriber than now, so I'm not surprised that these new tools have such an uptick in revenue month over month. But I've churned an outrageous amount of times for so many of them. So from an investor standpoint, do you feel like they're asking about churn and retention as much, or do you think it's just.

No, I think what you said is right. Which is the competitive deal dynamics make asking a lot of probing questions difficult because it is a little bit of game theory. If you're like, well, if all of the investors ask the same probing questions, we'd all be on equal footing. But there might be someone else who's like, I really want to win this deal. If the path to winning this deal is asking fewer questions, I'm Going to ask fewer questions. And while you're off in the data room doing due diligence, I'm going to sign a term sheet.

Right. And we're done. We talked about this on the POD before, about how gross margins are another metric that could start to drift away back in, I know, heat of the SaaS era, 75, 80, 90% margins. That's just what was considered good. And now with AI, it's drifting sub 30%. And I think people are thinking it'll correct itself. At what point do you think investors will establish a clearer set of metrics to guide this? Or do you think we don't care? Not we. The royal we.

I think when I ask people the margins question and when I ask, they laugh at me the way I just laughed out loud. I think there's a belief that COMPUTE is going to get cheap enough that a lot of the cost in scaling these things. So I would say a lot of the companies that are growing quickly don't appear to be very efficient in compute usage because you can't be when you're usage is going like this. And compute is still a significant input to cost. But to me, the question is like, well, yes, in a perfect scenario, prices you can charge stay high, compute costs come down and that drops the margin. But I'm like, what if because of competition, COMPUTE comes down, but the price you can charge also comes down? And then all you're doing is you're not getting any of the. You're not getting much of the benefit of the drop in compute because it's being eaten away by the competitive dynamic. And there's a lot of products I see where I'm just like, oh, this is like that other thing I used, but it's cheaper and it seems to be just as good, so why won't I turn and use the cheaper version? And I think that person's like, oh, once I get market share, I'll have some pricing power and I will either raise prices or drop costs. But I'm like, but what if as soon as you start to get market share, somebody else comes and does the same thing to you?

And if you're an investor, again to our question about portfolio conflict, you've already dumped a lot of money into this and then you see that happen. Do you abandon that investment? Just start being like, let me just sliding an investment over here, because it feels like that's going to be the next thing for the next handful of months?

Well, maybe if you have a growth fund, you can say, yeah, the growth.

Fund'S going to do this, light $100 million on fire. Any last thoughts on this one?

So I was talking to someone this morning. I think in 2021 everybody knew that they were overpaying, but they understood what they it wasn't like, oh, I don't know what this revenue means. Like, I'm going to put a 200x multiple on this 1 million of arrows. Win it to win it. I know I'm paying an aggressive multiple, but I think I understand the underlying thing I'm basing this multiple on. I'm very curious to see what happens maybe two years from now and when some journalist says let's go back and look at all those companies and I think there will be some actual fraud. Yep, I think there'll be some actual fraud that we find.

That's what Messi also asked. She's like, when do you think the next big thing that's going to be a documentary in six years is going to happen? And I said a little bit longer than you, but one to two years is jarring.

Oh yeah.

Our next topic is a recent piece by Jasmine sun, talking through the new key terms flooding the Bay Area in this post recession renaissance fueled by AI's rapid rise and permeating every corner of culture. This piece spotlights Silicon Valley's obsession with agency, the ability to act independently and shape one's destiny in a world where AI can answer questions but not develop goals. Being high agency means resourcefulness and initiative, while the NPC non player character label mocks those stuck following routines, oblivious to broader tech shifts. These memes reflect deeper worries about becoming part of the quote, permanent underclass as AI divides economic winners from losers, pushing returns to capital and threatening traditional middle class security. It's like actually a big existential word. Yes. Other cultural terms dissected include 996, so grueling work, culture, taste, knowing what's worth working on, and D cell doomer labels for those really skeptical or resistant to unchecked technological acceleration. Ultimately, she highlights how despite the wealth and bravado, status anxieties run deep and everyone founders, engineers, VCs are looking for meaning beyond the next big AI leap. It feels to me that there's a common thread feeling right now that everything in tech feels so serious, like one wrong move could drastically change an entrepreneurial journey. One diligence misstep could completely upend your venture career in this AI market. What were your reactions when you read the piece?

I feel like every now and then somebody writes a piece that totally Captures the moment. And I was like, oh, this is what it feels like to live in San Francisco right now. Shout out to one of our favorites, Hunter Walk for flagging this one for me. Like, there's so many things. One, I'd say I've never met more of my friends who are incredibly intelligent, talented people who are working really hard out of fear. Yeah, out of like fear that their competitors are working hard.

You're talking investor side or founder side?

Founder side, yeah. Who are working harder out of fear. And I think like fear and anxiety is not a good reason to work hard in startups. Personally, that's like my belief. I could go longer on that. But I think when I talk to a lot of people about this996, it's not because they're trying to keep up with customer demand. It's not like, oh my God, we have to be in here on Saturday because we have so many support tickets to deal with. We have so many. It's, I think, a fear that everybody else is doing it and am I a loser if I'm not working on Saturday?

Yes.

And what will happen if OpenAI drops something on Friday and we don't have a new version of our product out by Monday?

Like Sora.

Like Sora yesterday? Yeah. Like maybe nothing or maybe everything and like nobody knows. What I found is when you put high achieving people in a highly anxious moment, working harder is a natural control response that people. It's like, I can control the number of hours. I think one of my family members read the 996 article in New York Times. They're like, are people in San Francisco having any fun? And I think this like weird mix of stoicism and work culture, it's been fascinating to watch this, like, life is also about enjoyment and fun.

Yeah.

Yes, you should work a lot. And yes, work is serious. I hate to say it, some of these AI companies are deeply unserious and unimportant.

Yes.

And I don't mean that as an insult. I mean as a statement of fact. And I wonder how some of these people are going to feel two or three years from now when they look back and say, I spent 40 weekends in 2025 working on some random AI thing that I can no longer describe. And I didn't enjoy the time I spent with my coworkers. And to be clear, I've had jobs where I've worked a lot of hours and not all those hours are productive. But what I will say is many of my best startup friendships came from periods of intense work. But we were doing that because we had something that was working and we were trying to keep up with demand. And I always worry when people are applying a lot of hours pre product market fit or in the absence of demand, because that's a good recipe for burnout.

It also doesn't help that you have, I mean, all over social media. I think I've seen it from four or five different massively successful Fortune 500 CEOs that say, like, I've never met a successful person who wasn't grinding every day in their 20s. And then pair that with an influx of young founders who don't have other work experiences to point to of knowing what's a good use of time. There are obviously wildly successful young founders who all they did was work and it really did pay off. I feel like you're one of the biggest San Francisco Stans. Do you feel like this is one aspect of living in SF that's actually a negative if you're a founder?

I've thought about this a lot. I think it's just a fact. And I think like your competitors are going to do this, but if they have no good insights, those incremental marginal hours. When I graduated from business school in 05, I had a handful of friends who worked at Facebook right out of undergrad. They were at Facebook all the time. Yeah, I would meet them for dinner in Palo Alto and they would go back to Facebook. But that's because Facebook was vertical and that's because Facebook was solving real problems. The marginal value of an hour in a company that's scaling like that is incredibly high. And the marginal value of getting everybody in the company to put in the marginal hour, I don't want to get. The coordination cost is incredibly high. And I understood why they were spending so much of their lives at Facebook. Uber was the same way Uber was scaling. My friends at Uber work like dogs. They were always in the office, but it's because they were winning. They were scaling and growing and there was so much productive work to do. And I don't want to get too, like, philosophical. I feel like a lot of high achieving smart people, when they get anxious, they throw more hours at problems instead of stepping back. And I tell our founders this all the time. If you're working 70 hours a week, it's a lot. Let's just say objectively it's a lot of hours. And the problem isn't yielding. What are the odds that the 71st hour that you work is actually the magic online? Usually at that point you're missing something. Product doesn't work. Wrong customer profile, someone else is winning and you haven't figured out why it is rare that the raw application of additional hours.

Yeah.

Now what the raw application of additional hours can do with an in office culture is build really strong friendships and connection and trust. And that is super valuable. But I'd rather see people make those investments when they have something that has momentum and it's working.

We had our pre seed bootcamp in New York City last week and this was actually such a thread that all of our founders talked about was it's difficult to maybe have those conversations with yourself of maybe I'm not working on the right thing when all you see in the media is that 85th hour was the unlock. Media just doesn't want to focus on the more relatable story. That's just not interesting. And so I don't blame them.

One more thing I would add. My friend Lon from Basis Set had a really good LinkedIn post which was everybody should have one or two times in your life of intense work before you have other obligations. Children, spouses. For some people that's consulting. For some people, that's investment banking. For some people that's working at a zero to one startup. I do think it's an important and useful if you want to go far in white collar work, it's good to have one or two of those experiences and just know what it feels like to kind of not have a life. Yeah. For a year and then you can wrestle with like is this something I want more of? Does this trade off for success make sense?

So it'll be interesting to see that same thought for a generation of people who all they've known is being a founder. I know that'll be interesting.

I think in a year. I'm waiting for the blog post in a year. We did 996 for a year and it wasn't worth it.

Would they publish that?

They'll write.

The people who do the996 will they know to publish?

Some of them will write it because they'll want the clout.

Last question here because I think it's a good one. Between the different terms named in the piece996, taste, D cell, doomer Agency and then permanent underclass. Which one do you feel the strongest about either in agreement or disagreement?

I think for a lot of people in San Francisco, the fear of falling back and being in the permanent underclass is the dominant motivating theme because the city's full of really high achieving people with amazing academic and technical pedigree who are used to winning and being on top.

Yeah.

And if they're not on top, they're on top adjacent. Like they're very close. And the idea of like falling back into some permanent underclass kind of would invalidate very many of the things that they've spent their life pursuing, whether that's higher education, good grades, prestigious jobs. And I do think some of this is like a fear of falling behind. I feel it here.

And permanent underclass for people who are in sf. Does it truly mean that they're not included in like the big tech companies or is it just they truly are working and in a completely different sector?

I think it's irrelevance. I think it's like working on things.

Not a specific job.

It's not a specific job. It's just like you're just part of this vast. Like I talked to someone this week who's been a venture capitalist for a long time and I asked him like, you're very rich, why don't you retire? He goes, I don't enjoy my job, but I, I fear irrelevance more. And I was like, well, you're still a person without your job. But I know what he meant. Like a lot of the construct of that person's life was very work centric. We have a whole podcast about how you deprogram that in your life, but it's, it's real.

Well, our final topic, it actually came up in. Good timing. So it's a recent Wall Street Journal article shedding light on the massive amounts of debt taken on by large companies to build AI infrastructure. We talked about this last week and then you mentioned that maybe this should be an entirely new topic for a whole podcast. So here we are. Debt is quickly becoming the engine behind much of the AI industry's rapid growth. So while tech giants like Google and Microsoft built their early AI ambitions on profits from existing businesses, some players like Oracle and Core Weave and their peers are fueling expansion by taking on enormous loans and betting big on this future demand. So more specifically, Oracle recently signed a massive $300 billion five year contract with OpenAI, securing huge amounts of data center power. To deliver on this, Oracle has to borrow around $25 billion per year, pushing their debt to equity ratio to about 450%. It's far higher than the financial structure of companies like Alphabet and Microsoft. Similarly, Core Weave is making bold infrastructure bets by leveraging contracts and anticipated revenue. Investor enthusiasm remains high. Analysts mentioned that stock prices were going to triple in recent months. However, there are some groups who are skeptical about whether these companies will see the expected growth down. Ultimately, the article warns that the debt fueled race to build AI infrastructure could turn into a classic tech bubble if consumer adoption slows or contracts are postponed and canceled if growth stalls. Many of these ambitious plans and the companies behind them could be forced to reconsider their strategies in the face of mounting financial pressure. So, wanted to revisit what you said last week and see where you're headed.

I talked to a friend of mine in private credit and he's like, well, data centers equal private credit. I'm like, what it means. Like, all of the deals that I'm doing are data centers. I'm always hesitant to draw 99 analogies, but in 99, we put a lot of fiber in the ground with the expectation that we would need it soon. And good news is we ripped up all the streets, we put down a lot of fiber. We eventually needed it, we just didn't need it right away. And right now AI is going like this. It's vertical. People are trying to forecast how much capacity are we going to need in the future. And right now everyone's like, well, a lot more. And the thing that always scares me about debt is it's really hard to blow up an economy with equity. You wipe it out. Equity is risk capital. Equity markets are tiny compared to debt markets and debt expects to get repaid. And what if we're wrong about the timing of AI demand right now? I'd say this is a low probability event. But my learning in life is you should actually pay attention to low probability, high consequence events. And I'm like, if we are wrong on the shape of AI demand and we overbuild data center, which by not mostly like that's impossible. Like demand is, is growing so quickly. How could we overbuild that? We've done it before. We overbuilt houses in Las Vegas. We eventually needed them. But there's a moment in time. We had too many of those. We put too much fiber in the ground for that moment in time. We needed it eventually. I'm pretty convinced that all this data center capacity will get used eventually. But if we overbuild and these data centers aren't utilized and people can't make the returns and there's defaults, that to me feels like the thing that not enough people are thinking about because it seems so unlikely to happen.

And I actually think it's important to break down the Dynamics. Like, I think people are like, oh, boohoo. Insert name of massive credit fund goes out of business. But their LPs are pension funds.

That's right.

They are the retirement plans for everyday teachers. Credit is notoriously less risky vehicle to move money. If they start moving into a space that we know is still quite young. The same model that you've been reusing for real estate does not apply here. There are, there are massive consequences beyond super wealthy people not becoming wealthier.

I mean, you know, when you get defaults like that, lending standards go up, cost of money goes up. You can choke credit out of an economy really quickly.

Yes.

And look, I think part of what's happening is if you were doing data center deals five years ago, you are like, right, Those data centers are built to utilize. Right?

Yeah.

Everyone's like, well, it was great five years ago. What if we 10x the capital? What could go wrong? I'm like, other than everything, nothing. This is the thing I'm paying attention to because this is the one thing I'm like, not enough people are talking about this in the circles that I'm in. And the consequences of getting this wrong could be like catastrophic.

Yeah. And there's a disconnect between the people who run these large credit vehicles and people who sit at the earliest stages of venture of knowing what's to come and what things to hedge. Well, we are all out of time today. Thank you, Charles, for filming in person in San Francisco. Always better. Thank you to our listeners for shopping in. Please like and subscribe and we will talk with you all next week. Thank you. Bye.