Venture capital investors have unfortunately permitted the AI industry to severely distort how it reports its earnings.
To understand the root of this issue, we can look back at the 2010s when SaaS companies established the Annual Run Rate as a popular financial metric. This figure was highly reliable for projecting long term income because it was based entirely on contractual agreements. Forecasting those earnings into the future was completely appropriate, as the revenue was guaranteed for the entire lifespan of the contract.
However, when evaluating AI businesses today, VCs have adapted this concept into what they call Annualized Run Rate. Under this new interpretation, they take short term transactional or API revenue generated over just the previous month, or sometimes even a single week, and project that brief snapshot forward.
It is quite astonishing that investors have allowed this shift in reporting standards to occur, but it has indeed become the reality.
To understand the root of this issue, we can look back at the 2010s when SaaS companies established the Annual Run Rate as a popular financial metric. This figure was highly reliable for projecting long term income because it was based entirely on contractual agreements. Forecasting those earnings into the future was completely appropriate, as the revenue was guaranteed for the entire lifespan of the contract.
However, when evaluating AI businesses today, VCs have adapted this concept into what they call Annualized Run Rate. Under this new interpretation, they take short term transactional or API revenue generated over just the previous month, or sometimes even a single week, and project that brief snapshot forward.
It is quite astonishing that investors have allowed this shift in reporting standards to occur, but it has indeed become the reality.