How to lie to investors about your ARR
and how to easily spot those lies
I meet with 5–10 investors every week, and I keep hearing the words “extreme revenue growth.” We live in an era where ARR is no longer a trustworthy signal of a company’s future success. The main reason? Founders have gotten good at turning low-quality ARR into a narrative that suggests breakout potential.
But behind the spreadsheet magic, a lot of this revenue doesn’t stand up to scrutiny.
Over the last year, I’ve noticed four common tactics used to inflate ARR numbers. Some are misleading, others are borderline fraudulent, but all of them share a common goal: to turn what’s essentially a services business or a leaky funnel into something that looks like a SaaS rocket ship.
Here’s how companies are doing it—and how you can tell what’s real and what’s storytelling:
1. Churn-and-burn ARR
The easiest lie is still the most common: shovel money into customer acquisition, drive up your top-line ARR, and quietly lose 80 percent of it every quarter. The churn is hidden in plain sight, but often ignored in a rush to show growth.
How to spot it:
Look at cohort retention. If new revenue spikes but NRR (Net Revenue Retention) sits below 70 percent, you’re not looking at a business. You’re looking at a leaky bucket. No amount of logo growth can mask decaying cohorts. Dig into retention by month, not just by quarter, and insist on a view of revenue that's net of churn and downgrades.
2. ARR with a shadow engineering team
Another favorite: calling something "SaaS revenue" when in reality it's being propped up by a fleet of forward-deployed engineers. These engineers don’t work on the product. They work on the client’s product. Which makes them not engineers in the classic sense, but embedded services staff.
How to spot it:
If the company’s margin looks suspiciously low for a SaaS business, it probably isn’t a SaaS business. Look below the line—cost of services will be bloated. Headcount will skew technical but not product-focused. And when you ask about unit economics, you’ll hear stories about “strategic customers” that require “temporary” customization. Those customizations are permanent, and so is the burn.
3. Recording raised money as revenue
This one is rarer but more egregious. Some founders in early-stage companies have literally booked investment dollars as revenue. Not bookings. Not deferred revenue. Revenue.
How to spot it:
You shouldn’t have to. If this shows up in a diligence process, run. Not only is it dishonest, it’s illegal under GAAP. The second you hear “we counted a portion of the round as a customer commitment,” stop the conversation.
4. The pseudo-marketplace trick
The company claims to be a marketplace with huge top-line numbers, but they’re just acting as a passthrough. They take a transaction, claim the entire transaction volume as revenue, then quietly pay out 90 percent of it to the supplier or service provider on the backend.
How to spot it:
Gross margin will tell the story. If a company with $10 million in revenue only has $1 million in gross profit, they’re not building software. They’re arbitraging volume. That can work, but it’s not high-margin ARR. Check their revenue recognition policy and look closely at their COGS line—anything with high fulfillment cost doesn’t scale like software.
Closing Thoughts
Investors don’t fund revenue. They fund quality. ARR is a useful metric only when it's real, recurring, and high margin. Anything less is just a short-term trick.
As a founder, the pressure to inflate your numbers is real. But long-term companies are built on long-term trust. And the fastest way to earn that trust is to show your work, own your reality, and build something that holds up to scrutiny.
The truth is, most investors can spot the lie. The question is whether you’re the one telling it or the one getting sold.