Revenue models, metrics, and the investor conversation in the consumption era
In the old days, life was simple.
Software companies sold perpetual licenses with maintenance and support attached, and revenue meant exactly what it sounded like: money earned. You shipped a product, the customer paid, and you booked the revenue. Investors, founders, and accountants all spoke the same language.
Then came SaaS.
Around the year 2000, subscription software emerged as the new model of choice, promising smoother revenue curves and durable retention. In July of that year, I sat on the board of a company that went public—quite possibly one of the very first pure-SaaS IPOs in history.
I can tell you that almost no one understood what SaaS really meant at the time. How should bookings be reported? Which metrics should drive the stock price? What did "ARR" actually capture about the health of the business? It took the better part of a decade for the industry to converge on shared definitions, and even then, the edges stayed fuzzy.
Fast-forward to today, and we are living through another revenue-model transition that is every bit as disorienting as the shift to SaaS, and arguably more consequential.
A quiet crisis in how we talk about the business
I want to be direct about something before going further: There is a crisis brewing right now in how new-economy business metrics are being communicated, and most of the people involved don't yet realize how serious it is.
There is a crisis brewing right now in how new-economy business metrics are being communicated, and most of the people involved don't yet realize how serious it is.
Across fundraises, board meetings, and quarterly updates, I am watching founders and investors talk past each other on basic questions like “What is the company's revenue?” “What is recurring?” “What is at risk?”, and “What should we expect twelve months from now?”
The same word means different things to different people in the same conversation. Definitions are loose. Categorizations are inconsistent. Comparisons across companies are increasingly meaningless. And the gap between what investors think they heard and what founders think they said is widening.
This is not an accounting curiosity. The consequences are real and already showing up.
Founders' personal integrity and reputations are being called into question over what were, in many cases, honest definitional misunderstandings.
Investors are facing uncomfortable conversations with their partners and LPs when run-rate numbers they reported in good faith turn out to mean something different on closer inspection.
Trust between founders and their boards is fraying. And in the worst cases, these miscommunications are no longer staying private, but are escalating into formal disputes, allegations of misrepresentation, and the early stages of litigation risk.
Once a deal closes on a number that later proves to mean something else, the lawyers can get involved quickly.
What makes this pattern especially painful is who it is happening to. The founders I see ending up on the wrong side of an integrity conversation are, overwhelmingly, high-quality, deeply honest operators. They are not bad actors.
They got caught because the metric language itself has become unstable: a number that meant one thing when they said it meant something different by the time it landed in the investor's model.
Intent does not protect you. Once trust has been bruised over a number, the reputational damage looks the same whether the miscommunication was deliberate or entirely accidental, and good founders are absorbing that damage every week, often without realizing how exposed they were until it is too late.
If this pattern sounds familiar, it should.
In the early 2000s, a string of accounting scandals at public companies — Enron, WorldCom, Tyco — revealed that the gap between what the numbers said and what the numbers meant had become dangerous.
The response was Sarbanes-Oxley: sweeping legislation that forced public companies to adopt rigorous reporting standards, certify the accuracy of their financials, and accept personal accountability for how the numbers were communicated. It was painful, expensive, and largely effective.
Private companies are now approaching their own Sarbanes-Oxley moment.
The metric confusion around consumption revenue is producing the same corrosive dynamic: numbers that technically pass muster but leave the people relying on them with a fundamentally different understanding of the business. The pressure for formalized standards, stricter definitions, and real accountability is building.
Founders can either get ahead of that curve voluntarily or wait for it to be imposed on them by investors, auditors, or worse.
The good news is that almost all of this is preventable. The tools are clear definitions, consistent application, and complete candor applied early and held to throughout the relationship.
ARR no longer means what it used to mean
What's emerging in revenue pricing is a hybrid of the traditional SaaS model and a consumption-based model: a recurring platform fee layered with a consumption charge tied to actual usage. The platform fee recurs in the traditional way. The consumption component does not. Customers can take minimums, get tiered discounts for larger commitments, and structure their spend the way they already do with GCP or AWS.
This sounds tidy on paper. In practice, it has scrambled the metrics that investors and founders use to talk to each other.
Take ARR. For two decades, ARR stood for annual recurring revenue, the contractually committed, recurring portion of a SaaS book of business. Clean, durable, comparable across companies.
In the consumption era, many companies have quietly redefined ARR to mean annual run rate, typically the most recent month or quarter of revenue, annualized.
The two definitions sound nearly identical. They are not. One captures contractually durable revenue. The other captures a snapshot of consumption that may or may not repeat next month.
This is a profound difference in what is being claimed about a business. Founders and investors need to be precise and explicit about which definition is in play in any given conversation.
Trials, POCs, churn, and the temptation to categorize
A second area where the language has gotten loose is how companies account for trials, paid POCs, rejected revenue, churn, and opt-outs. There are several defensible ways to slice this. There is no single correct answer. What is essential is that the definitions be clearly communicated and consistently applied.
There is, of course, understandable pressure to minimize capital-C Churn. So many companies push as much as they reasonably can into "canceled POCs," "expired trials," or "rejected revenue," none of which they treat as churn. Defensible? Often yes. But only if it is internally consistent.
The catastrophic failure mode looks like this: a company counts a paid POC as part of its run rate when the deal is signed, then declines to call it churn when the customer walks away. You cannot have it both ways. If it counted as run rate on the way in, it has to count as churn on the way out. Anything else is a metric that only moves in one direction, and sophisticated investors will spot it immediately.
What investors are really trying to triangulate, beneath all of these labels, is one number: the true forward run rate, which is the closest possible estimate of recognized revenue over the next twelve months. That is the king metric.
Every definition you use should be tested against the question, Does this help an investor get to a credible number for the next twelve months, or does it obscure it?
The truth, the whole truth, and nothing but the truth
I have seen too many examples recently where significant misunderstandings have erupted between investors and founders, and the conversation has veered into accusations around integrity and truthfulness.
This is a toxic place to end up, and it needs to be taken seriously by both sides.
Everyone hates downside surprises. If an investor makes an investment decision based on a specific run-rate figure and later discovers the number meant something different than they understood, that is a very tough spot for everyone involved. Investors have fiduciary obligations and will be held accountable by their partners and ultimately by their LPs.
Founders, in turn, will be held accountable by their investors.
Both parties must be hyper-vigilant.
Here is the trap I see founders fall into most often: they tell the truth and nothing but the truth, but not the whole truth.
The number you cite, the metric you headline, the cohort you don't show, all of it lands inside a story the investor is constructing about the business. If a number is technically accurate but the surrounding context would change the conclusion, you haven't told the whole truth. And when the missing context surfaces later—as it always does—the conversation will not be about the metric. It will be about your integrity.
The discipline I urge founders to embrace is the full courtroom oath: the truth, the whole truth, and nothing but the truth. Always.
A practical checklist
For founders walking into a fundraise, an investor update, or a board meeting in this new landscape, three disciplines matter:
1. Define your terms with surgical precision. Especially ARR, which now means different things to different people. Spell out, in writing, how you treat paid POCs, trials, opt-outs, expired pilots, and any form of non-renewal. If your definition diverges from market convention, say so plainly.
2. Show your work historically. Don't just give the current quarter's number. Show how the same definitions, applied consistently, looked one year ago, two years ago, four quarters in a row. Consistency over time is the single most powerful signal of metric integrity.
3. Anchor on the investor's true question. What investors really want is a credible answer to: How much revenue will this company recognize over the next twelve months? Build your reporting backward from that question, and tell them the truth, the whole truth, and nothing but the truth in answering it.
The revenue model will keep evolving. Consumption will give way to whatever comes next. But the foundation of any durable investor relationship, clarity, consistency, and complete candor, is the one thing that doesn't change.
