It’s likely safe to say—creative accounting’s been around for as long as accounting itself.
In 1494, for example, mathematician and ‘father of modern accounting’ Luca Pacioli wrote of Venetian merchants willfully rendering their ledgers illegible. In the Gilded Age, inflating assets and understating liabilities was standard practice across a booming system. And who can forget the “channel stuffing” of the 2000s?
And, because some things are eternal, this era naturally has its own creative accounting practices, which I published a feature on this past weekend. Right now, some of the most clear shenanigans are going on around ARR, or “annual recurring revenue.”
ARR was a favorite metric of VCs throughout the software-as-a-service (SaaS) era, widely accepted as a trusted proxy for a stable and growing startup. Now, founders are trying to apply ARR to the AI boom—and it doesn’t fit. These days, founders are counting pilots, one-time deals, or unactivated contracts as recurring revenue, six VCs told Fortune. The push comes from somewhere very human, from a desire to keep up with the competition.
“There is all this pressure from companies like Decagon, Cursor, and Cognition that are just crushing it,” said another VC. “There’s so much pressure to be the company that went from zero to $100 million in X days.”
At the center of all this is an essential truth: That we’re going to need to evolve metrics with AI, and how AI companies actually work.
And in the meantime, it’s worth saying: Creative accounting has been around as long as businesses were counting, but that doesn’t mean it’s good practice. That doesn’t mean it’s safe or healthy for the system. And it doesn’t mean there won’t be consequences for some down the line.
See you tomorrow,
