As competition among AI startups intensifies, founders and VCs are turning to new valuation mechanisms to create perceptions of market power.
Until recently, the hottest companies raised multiple rounds of funding in quick succession as their valuations rose. But because constant funding was hindering founders from building their products, the lead VC devised a new pricing structure that effectively consolidated the two separate funding cycles into one.
Recent rounds adopting this plan include Aaru’s Series A; The Wall Street Journal reported that the synthetic customer research startup raised a round led by Redpoint, which invested a significant portion of the check at a valuation of $450 million. According to our reporting, Redpoint invested a smaller portion at a $1 billion valuation, with other VCs joining in at the same $1 billion price tag. TechCrunch was first to report Aaru’s funding, including its multi-stage valuation.
This approach allows desirable startups like Aaru to call themselves unicorns (valued at over $1 billion) despite acquiring a significant portion of the stake at a lower price.
“It’s a sign that the market is incredibly competitive for venture capital firms to get deals done,” said Jason Shuman, general partner at Primary Ventures. “If the headline numbers are big, it’s an incredible strategy to scare other VCs away from backing the second and third-place players.”
Large “headline” valuations create the aura of market winners, even though the average prices of leading VCs were significantly lower.
Several investors told TechCrunch that, until recently, they had never seen a deal where a major investor split capital between two different valuation tiers in a single round.
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Wesley Chan, co-founder and managing partner of FPV Ventures, sees this valuation strategy as a symptom of bubble-like behavior. “You can’t sell the same product at two different prices. Only airlines can avoid that,” he said.
In most cases, founders offer discounts to top-tier VCs. Because their participation serves as a powerful market signal that helps attract talent and future capital.
But these rounds are often oversubscribed, so startups have found ways to accommodate the excess interest. Instead of turning away eager investors, they allow them to participate immediately at a much higher price. These investors are willing to pay a premium because it’s the only way to secure a spot at the high-demand cap table.
Another startup that has secured preferential pricing from major investors is Serval, an AI-powered IT help desk startup, according to The Wall Street Journal. Sequoia’s lowest entry price was valued at $400 million, but Serval announced a $75 million Series B valuation in December, valuing the company at $1 billion.
A high “headline” valuation can help recruit talent and attract corporate clients who may see the company as having a stronger market position than its competitors, but this strategy comes with risks.
The actual blended valuation of these startups is less than $1 billion, but they are expected to raise their next round of funding at a valuation higher than the headline price. Failure to do so will result in punishment, Shuman said.
Although these companies are currently in high demand, they may face unexpected challenges that make it difficult to justify their high valuations. In a down round, employees and founders end up with a smaller stake in the company. It can also erode the trust of partners, customers, future investors, and potential new hires.
Jack Selby, managing director at Thiel Capital and founder of Copper Sky Capital, warns startups that chasing extreme valuations is a risky game, pointing to the painful market reset of 2022 as a cautionary tale. “It’s very easy to fall when you put yourself in these dangerous fumes,” he said.
