#15 🚨 Why That ARR Number You’re Flexing Might Be Lying to You

And what smart founders are tracking instead to build real, long-term value

Let me guess—you just crossed $1M ARR.

Your Slack blew up. Your friends reposted it. Maybe you even dropped it into a LinkedIn thread or two.

Congrats, really. I know how hard that milestone is to reach.

But here's the uncomfortable question I want to ask:

How much of that ARR will still be there next year?

Because we’re entering a new paradigm—especially for AI-native and SaaS founders—where ARR speed is no longer correlated with business durability.

The old playbook (blitzscale to ARR, raise, repeat) worked when software was sticky and switching was painful. But AI flipped the economics of software. Tools are easier to try, contracts are shorter, and real adoption is often lagging behind revenue.

So if you're measuring success on ARR alone, you're playing the wrong game.

In this article, I’ll break down:

1. Why ARR is no longer the North Star metric

2. What founders should track instead

3. How to turn this into a go-to-market advantage

Let’s dig in.

---

🔁 1. The Myth of Fast ARR: What Growth Isn’t Telling You

SaaS culture has built a religion around ARR milestones. $1M. $5M. $10M. You hear it in boardrooms, on podcasts, in investor decks.

But here’s what’s changed:

👉 It’s easier than ever to reach ARR.

👉 It’s harder than ever to keep it.

Why?

Because today’s software adoption—especially in AI and PLG motions—is:

Fast to test

Cheap to integrate

Easy to cancel

In other words: revenue is more transient than ever.

Before, a 12-month contract often implied serious effort: multiple champions, training, implementation. Even if the ROI wasn’t there yet, the sunk cost made churn unlikely.

Now, I see startups with $500K+ in ARR—and 80% of it is at risk.

Pilot contracts. Monthly commitments. Single-user licenses from large enterprises still “testing” the tool.

And here’s the kicker:

Most founders don’t segment this risk in their revenue model. They present it all as equal—when in fact, much of it is a ticking time bomb.

---

📉 2. Why Retained ARR Beats ARR (Every Time)

Here’s the real question you should be asking:

> “What portion of my revenue is still active twelve months later?”

That’s your LTM ARR (Last Twelve Months ARR)—and it’s a far better health check than your current MRR × 12 fantasy.

A few red flags to look for:

• Less than 30% of your revenue is on contracts longer than 6 months

• More than 50% of your clients are on monthly pilots

• You’re growing ARR fast, but net retention is below 80%

If that sounds familiar, you don’t have a business yet.

You have an experiment with revenue.

Here’s a better way to think about your revenue:

🟢 Committed ARR:

• Contracts ≥ 12 months

• Multi-seat licenses

• Integrated into workflows

• Clear ROI delivered or expected

🔴 At-Risk ARR:

• Pilots, POCs

• Contracts < 3 months

• Single-use cases, no champions

• No measurable ROI yet

Most startups today treat these the same in their pitch deck.

Smart founders don’t.

---

⚠️ 3. The Pilot Trap: Why Enterprise Revenue Isn’t Real (Yet)

Another illusion I see all the time:

Founders landing a big logo, announcing a pilot, and treating that as ARR.

Let’s get real:

Enterprise AI pilots can last 6–12 months.

In that time:

Your champion may leave

The tool may not be integrated

No business value is measured

And yes—they might never convert

Even if they do, it's often after you've burned capital showing off inflated ARR.

The risk? You start scaling based on fake signals:

Hiring sales reps to “repeat” an unrepeatable sale

Ramping customer success before real adoption exists

Misleading investors with vanity metrics

Founder advice:

Qualify your revenue based on contract length and conversion risk.

A simple metric that helps:

➡️ Average Contract Length (ACL)

If your average contract is 2.5 months, your startup is a temp agency, not a SaaS.

Raise the bar. Build for longevity.

---

🧮 4. New Economics: Why AI Is Breaking SaaS Margins

The old SaaS model was beautiful:

You wrote code once, deployed it cheaply, and scaled with 80–90% gross margin.

Then came AI.

Now, every usage call has a real, variable cost—especially if your tool relies on external LLMs like OpenAI, Anthropic, or Mistral.

This changes everything.

The more your users engage, the higher your marginal cost

You don’t own your infrastructure—you’re renting it

If the LLM provider changes pricing? Margin crunch, instantly

This is the new reality of AI SaaS.

You don’t scale costlessly anymore.

And that brings us to the new Rule of 40.

-

📊 5. Forget the Old Rule of 40—Here’s the New Bar

The old benchmark:

> Revenue Growth % + Free Cash Flow Margin % ≥ 40%

Great in the age of cheap cloud.

But irrelevant if you’re bleeding margin with every new user.

Today, savvy founders and investors are recalibrating:

Gross margin becomes priority #1.

You need 50%+ gross margin just to survive.

Anything lower, and your model isn’t defensible.

Here’s how to apply it:

✅ Track marginal cost per user or API call

✅ Run sensitivity tests on LLM pricing shifts

✅ Start planning how to reduce inference cost (open source, batching, caching, etc.)

Margins are your new moat.

---

💡 Founder To-Dos: What You Should Do This Week

1. Audit your revenue buckets.

Split ARR into committed vs. at-risk. Create a slide for your deck that does this.

2. Report LTM ARR.

Show what revenue has stuck around over 12 months. Investors will appreciate the transparency.

3. Track ACL and pilot conversion rate.

Use these to inform sales forecasting and resourcing.

4. Understand your marginal cost.

Talk to your tech team about where LLM cost lives in your P&L.

5. Shift your GTM focus from closing to sticking.

Land-and-expand is dead if there’s no “expand.” Obsess over adoption.

---

🧨 Final Thought: What’s the Point of ARR If It’s All Gone Next Year?

You didn’t build a startup to brag at dinner parties.

You built it to solve a real problem—at scale for the long haul.

So stop chasing vanity metrics.

Start building resilient revenue.

Because in the next 24 months, the companies that will raise, survive, and dominate will be the ones that can retain revenue—not just close it.

If you're a founder and you're thinking about how to build or improve your sales approach, I'm open to reviewing your business and helping identify quick wins to accelerate your revenue cycle.

Even if it's just spotting one bottleneck or suggesting one change—I'm happy to collaborate and see if I can drive meaningful results for your business.

Thank you for reading.

P.s. IF you enjoyed this, I’d super appreciate a quick share on twitter or Linkedin 🙏 .