A COMPANY ON A ROCKETSHIP
This morning, a friend shared an article about a Y-Combinator company that raised a large seed round. The piece highlighted “impressive traction” on little headcount. I don’t know much about the company itself, but it prompted reflections on how the tech press reports early stage funding rounds.
Every few weeks, the same story appears: headlines announce millions raised, valuations are presented with excitement, and inevitably there’s mention of ARR.
At first glance, the numbers are impressive, designed to give the impression of a company on a rocket ship. But step back, and it’s worth asking who benefits from these narratives, and how much reflects business reality. The company, investors, and media all have “skin in the game” when it comes to sustaining a valuation story - and behind the scenes, things often look very different.
HOW IS ARR CALCULATED
Having been involved in multiple early stage companies myself, and knowing many entrepreneurs who have raised funding, I know that ARR figures often tell you far less than they suggest. The real questions - almost always missing from press releases - are the ones that determine whether a business is strong:
How is monthly recurring revenue calculated? Is it based on signed contracts, invoices paid, or verbal commitments?
What does the gross margin look like? $1M revenue is meaningless if it costs $2M to acquire customers and $3M to deliver.
What about retention? If 80% percent of customers churn after month 1, ARR is misleading.
What is LTV:CAC? That ratio tells you about sustainability.
Are refunds, discounts, or chargebacks included in the revenue figure?
Strip away the hype, and reported ARR can prove fragile.
ANOTHER TYPE OF COMPANY
Some of the most successful entrepreneurs I know, operate very differently. They run profitable businesses, generating consistent cash flow, but you won’t find them on TechCrunch. They don’t hype themselves on social media, and in some cases, their businesses don’t even have websites!
The irony is that for most customers, knowing their vendors' ARR is not a selling point. What matters is the delivery of a customer outcome, not fundraising milestones.
This all makes sense once you realise who ARR announcements are really for. Customers are not the target. The audience is investors. The risk, however, is that founders shape their companies around what appeals to investors, rather than what delights users.
HYPE IS NOT ALL BAD
I’m not suggesting that all hype is bad. If it attracts investment and talent, it can become a self-fulfilling prophecy. But it’s worth maintaining a scepticism when reading about a company’s ARR.
Ask why the numbers are being shared, who stands to benefit, and what might be missing. Until you have visibility on the actual P&L (ideally company bank statements!), it’s wise to treat such claims with caution.
At the end of the day, the best businesses don’t always shout the loudest. They work - whether or not TechCrunch writes about them.
thanks for sharing this, great article. to the less informed about ARR like myself I am always super impressed hearing these ARR figures but good to know the ways they can be manipulated