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For AI this year, the story has been one of relentless acceleration.
Startups have raced to launch market-changing products, enterprises have rushed to test them, and VCs have scrambled to fund them. Globally, the scale of AI investment hit $275 billion this year, according to PitchBook data, doubling the amount spent in 2024. Valuations and deal sizes have followed a similar trajectory.
For all the VC dollars pouring into AI, though, a weakness has emerged in the sector's financial underpinnings.
When examining fast-growing AI startups, annual recurring revenue has overtaken valuations as the go-to metric used to flaunt a company's expected yearly earnings.
Swedish vibe coding startup Lovable reached $100 million in ARR in just eight months, while app builder Emergent reportedly achieved $15 million in only 90 days. According to SaaS benchmarking platform ChartMogul, only one in 10 hit $10 million ARR, and AI-native startups are eight times more likely to reach that milestone within 12 months than the average SaaS business.
But this same metric is now raising eyebrows for the wrong reasons. Investors are growing increasingly concerned that ARR may be far less predictable than the market narrative suggests. As talk of a looming correction grows louder, the durability of that revenue base will influence the next phase of AI.
I'm Leah Hodgson, and this is The Weekend Pitch. You can reach me at leah.hodgson@pitchbook.com or on X @LeahFHodgson.
"The last two years have been wild," Marina Davidova, co-founder and managing partner at VC firm DVC, said. "We see some of the fastest-growing companies in history, but it’s never been harder for VCs to see through the noise of bloated numbers."
For decades, ARR has been a key metric that VCs depend on to gauge the financial health and growth potential of subscription-based startups. When a customer signs up for an annual plan, that revenue is recurring until the contract ends, allowing SaaS startups to forecast future cash generation with high accuracy.
At its simplest, ARR is calculated by multiplying monthly recurring revenue by 12. But that shorthand only works when a company's revenue is stable and genuinely recurring. In practice, not all revenue qualifies as ARR, and even within that ARR, the quality can vary depending on factors such as churn and contract terms. For AI startups, the financial outlook can become even muddier.
"For the majority of AI-native companies, ARR isn’t really ARR as we know it, but rather a hodgepodge of one-off, credits-based, performance-based or outcome-based revenue contracts," Mikael Johnsson, GP at VC firm Oxx, said. "This means that the predictability and stickiness for this revenue will be much worse than traditional subscription-based revenue." |
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If SpaceX moves forward with an IPO at an $800 billion valuation, it will be one of the largest IPOs in history, and the largest for Silicon Valley. The largest IPO from the region to date was Facebook's in 2012. How many times would Facebook have to IPO to equal the value of the potential SpaceX listing?
A) 2
B) 4
C) 6
D) 8
Find your answer at the bottom of The Weekend Pitch! |
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A selection from our most-read articles of the past few days.
- Medical-surgical supplier Medline’s IPO ranks as one of the largest PE-backed IPOs in the US this year, a key test of investor appetite after months of market volatility. Read the full report
- Deep-pocketed private credit managers are increasingly stepping in to finance technology giants' capital-intensive data-center buildouts. But some private lenders are taking a more cautious stance. Full story
- A maturing market and more family office participation have helped reverse the decline in LP commitment to Europe's first-time managers—a stark contrast to their US peers. Read more
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“Given the size and the amount of capital that Medline was able to raise today, I think it signals positive momentum on the private side. An IPO of this size demonstrates the resiliency of the market and the return of a margin of safety to the equity market."
—Keonhee Kim, a healthcare equity analyst at Morningstar, speaking about Blackstone-backed medical supply company Medline raising over $6 billion in its IPO this week. Read more about Medline's IPO and what it could mean for other PE-backed companies here. |
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Keep an eye out for these insights and research reports coming out this week:
- Q3 2025 Mobility Tech VC Trends
- Analyst Note: AI Work Flow Agents in Healthtech
- Analyst Note: Evergreen Real Assets Funds
- Analyst Note: Ecommerce AI Premium
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Answer: D
In today’s dollars, Facebook completed its IPO at a pre-money valuation of $91.9 billion, meaning it would take eight IPOs of that size to reach the same valuation that SpaceX could have in its IPO next year. See more figures about just how massive SpaceX's listing could be here. |
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This edition of The Weekend Pitch was written by Leah Hodgson and Nadine Manske. It was edited by Andrew Woodman and Michael Bruning.
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