My only pushback is that velocity isn’t the enemy, confusion is. Fast growth is fine as long as founders are honest about what they control and what they’re renting. The danger starts when those two blur.
Thanks, Chris, this is an excellent reminder as to why ARR is a poor indicator for real growth in the AI sector. How long do you think the market will continue to ignore the disconnect between revenue growth and actual profitability?
This really captures something many founders overlook — that headline number isn’t the real engine, it’s what’s behind it that matters. According to a 2024 survey by OpenView, companies with over 70 per cent of revenue from recurring sources grow more predictably and are valued higher by investors, so understanding what is truly recurring versus pass‑through is crucial. The analogy to marketplaces’ GMV hype helps make that idea tangible without jargon. If founders focus on durable economics rather than surface growth curves, they’re much better placed for long‑term resilience. What’s one early warning sign you’d advise founders to watch for that shows their ARR is more mirage than momentum?
To be clear, this is a problem with ARR in general, since long before AI hit the mainstream. There are pass-through costs in all kinds of SaaS products, such as those that use AWS S3 or API Gateway (literally every API call can end up costing you).
But prior to AI, the pass-through tended to be either situational (e.g. payment processors taking 2.9%+) or so low that it didn't significantly impact the final numbers.
So, it feels more like AI has exposed this more clearly, because the per-call AI costs end up being quite significant.
What it ultimately reveals is that it has NEVER really made sense to look at ARR in isolation, and posts and charts and whatnot that focus on it by itself have always been empty calories.
It shouldn't really come as a surprise to realize that what ultimately matters is always profit, not revenue.
This is a key insight. The whole notion of what constitutes "Annual Recurring Revenue" is being fundamentally re-evaluated in the AI space.
I think the "Control Line" is a brilliant mental model for founders to use right now. If your growth is acceleration based on someone else's infrastructure, you're building on leased land.
Agree with this post.
My only pushback is that velocity isn’t the enemy, confusion is. Fast growth is fine as long as founders are honest about what they control and what they’re renting. The danger starts when those two blur.
Thanks, Chris, this is an excellent reminder as to why ARR is a poor indicator for real growth in the AI sector. How long do you think the market will continue to ignore the disconnect between revenue growth and actual profitability?
This really captures something many founders overlook — that headline number isn’t the real engine, it’s what’s behind it that matters. According to a 2024 survey by OpenView, companies with over 70 per cent of revenue from recurring sources grow more predictably and are valued higher by investors, so understanding what is truly recurring versus pass‑through is crucial. The analogy to marketplaces’ GMV hype helps make that idea tangible without jargon. If founders focus on durable economics rather than surface growth curves, they’re much better placed for long‑term resilience. What’s one early warning sign you’d advise founders to watch for that shows their ARR is more mirage than momentum?
Excellent post.
To be clear, this is a problem with ARR in general, since long before AI hit the mainstream. There are pass-through costs in all kinds of SaaS products, such as those that use AWS S3 or API Gateway (literally every API call can end up costing you).
But prior to AI, the pass-through tended to be either situational (e.g. payment processors taking 2.9%+) or so low that it didn't significantly impact the final numbers.
So, it feels more like AI has exposed this more clearly, because the per-call AI costs end up being quite significant.
What it ultimately reveals is that it has NEVER really made sense to look at ARR in isolation, and posts and charts and whatnot that focus on it by itself have always been empty calories.
It shouldn't really come as a surprise to realize that what ultimately matters is always profit, not revenue.
This is a key insight. The whole notion of what constitutes "Annual Recurring Revenue" is being fundamentally re-evaluated in the AI space.
I think the "Control Line" is a brilliant mental model for founders to use right now. If your growth is acceleration based on someone else's infrastructure, you're building on leased land.
Chris, that Lego stack is a perfect visual summary of your main point.
I'll keep that in mind as more and more people in educator/coaching world start hyping "their own OS" tools.
Or when clients ask about the real cost of having one.