As competition among AI startups intensifies, founders and venture capitalists are turning to new valuation mechanisms to create a perception of market dominance.
Until recently, the most sought-after companies have raised multiple rounds of funding in rapid succession, at increasing valuations. However, as constant fundraising distracts founders from building their products, leading venture capital firms have designed a new pricing structure that effectively consolidates what would have been two separate funding rounds into one.
Recent rounds using this system include Aaru’s Series A. The synthetic customer research startup raised a round led by Redpoint, which invested a large portion of its check at a $450 million valuation, The The Wall Street Journal reported. Redpoint then invested a smaller portion, valued at $1 billion, and others Venture capital firms joined in the same billion dollars price level, according to our reports. TechCrunch was the first to report Aaru’s financingincluding its valuation at several levels.
This approach allows sought-after startups like Aaru to qualify as unicorns — valued at more than $1 billion — even if a significant portion of the equity was acquired at a lower price.
“It’s a sign that the market is incredibly competitive for VCs to win deals,” said Jason Shuman, general partner at Primary Ventures. “While the figure announced is huge, it is also an incredible strategy to dissuade other venture capital firms from backing the number two and number three players.”
The massive valuation of the title creates the aura of a market winnereven though the average price of the main venture capital was significantly lower.
Several investors told TechCrunch that until recently, they had never encountered a deal in which a lead investor split their 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 tactic as a symptom of bubble-like behavior. “You can’t sell the same product at two different prices. Only airlines can get away with it,” he said.
In most cases, founders offer a discount to top-tier venture capital firms because their involvement provides a powerful market signal that helps attract future talent and capital.
But because these rounds are often oversubscribed, startups have found a way to manage the excess interest: rather than turning away enthusiastic investors, they allow them to participate immediately, but at a significantly higher price. These investors are willing to pay this premium because it is the only way to secure a place on a high-demand capitalization table.
Another startup that gave preferential pricing to its lead investor is Serval, an AI-powered IT help desk startup, according to the Wall Street Journal. While Sequoia’s lowest entry price was $400 million, Serval announced in December that its $75 million Series B valued the company at $1 billion.
While the high “overall” valuation can help recruit talent and attract corporate clients who may view the company as having a stronger market position than its competitors, this strategy is not without risks.
Even if the true overall valuation of these startups is less than $1 billion, they are expected to raise their next funding round to a valuation higher than the overall price; otherwise, it will be a punitive round, Shuman said.
These companies are in high demand right now, but they could face unexpected challenges that will make it very difficult to justify their high valuations. In the event of a decline, employees and founders are left with a lower percentage of ownership in the company; they can also erode the trust of partners, customers, future investors and potential new recruits.
Jack Selby, managing director of Thiel Capital and founder of Copper Sky Capital, warns founders that chasing extreme valuations is a dangerous game, pointing to the painful market reset of 2022 as a warning. “If you get into this high-wire act, it’s very easy to fall,” he said.
Marina Temkin is a venture capital and startups reporter at TechCrunch. Before joining TechCrunch, she wrote about venture capital for PitchBook and Venture Capital Journal. Earlier in her career, Marina was a financial analyst and earned her CFA designation.
You can contact or check Marina’s outreach by sending an email marina.temkin@techcrunch.com or via encrypted message at +1 347-683-3909 on Signal.
