Scott Stevenson, CEO of Spellbook, exposed what he called a "huge scam" among AI startups: inflating revenue figures. The controversy centers on contracted ARR (CARR) being misrepresented as actual ARR. CARR includes revenue from signed contracts that aren't yet implemented or paying customers, a practice that has drawn criticism from multiple founders and investors.

Investors are often aware of these exaggerations but remain silent. Some companies report CARR figures 70% higher than actual ARR. High-profile enterprise startups have claimed $100 million in ARR when only a fraction came from paying customers. The pressure to show rapid growth amid AI hype incentivizes VCs to overlook these misrepresentations, creating a cycle of inflated metrics.

The practice reflects broader issues in startup valuation culture. VCs may support inflated numbers to create narratives of "runaway winners" and gain positive press coverage. While most cases involve smaller discrepancies, the trend suggests a fundamental problem with how AI startups are valued and how transparency is maintained in an increasingly competitive funding environment.