Bursts of Color - ARR or ERR?
I caught up with a founder last week who was early to build an enterprise-facing AI business. In recounting some recent ups and downs, her memorable line was:
We grew fast to $12 million ARR. That turned out to be a bad thing.
Wait, how is $12M bad? Well, as renewal time came around, they lost half of those early customers and had to start over with filling a very leaky bucket.
Fortunately for this company, they have since moved downmarket and appear to have found a more stable customer base and price point from which they can reignite growth. Fingers crossed.
I’m hearing a lot of stories like this, and the associated debate about whether such new AI revenue is ARR (annual recurring revenue) or just “ERR” (experimental recurring revenue)… which may not actually recur at all.
The Good News: High Willingness to Pay
Customers of all budget sizes are experimenting with AI right now… from $10/mo consumer apps to $1M enterprise setups. This has led to incredible revenue growth among the latest generation of startups.
The Bad News: High Willingness to Switch
Many of these same buyers are also happy to keep experimenting next month or next year… meaning they will bring the service in house, try a new vendor or both. I just bought three new prosumer AI tools myself to test last week - and then immediately unsubscribed.
What’s a Company To Do?
No easy answers here. There’s a land grab happening, and it is coming as fast as any I have seen. So I suspect the eventual winners will find a way to land customers as fast as they can while the getting is good… while also keeping a cautious eye on how to keep those customers happy. Easier said than done, I know.
Related Reading
Pricing for Vertical AI Startups from NVP
Don’t be Surprised if VCs Aren’t Impressed with Your ARR from Carta
I Spend $890 Per Month on AI Tools from Keith Richman
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