As competition among AI startups intensifies, founders and venture capitalists (VCs) are exploring new valuation tactics to create an impression of market leadership. Previously, top companies would raise several funding rounds rapidly at increasing valuations. However, since constant fundraising can detract from product development, lead VCs have introduced a pricing model that merges what would typically be two separate funding rounds into a single cycle.
An example of this strategy is Aaru’s Series A round. The synthetic-customer research startup secured funding led by Redpoint, which invested a significant portion of its contribution at a $450 million valuation, as reported by The Wall Street Journal. Subsequently, Redpoint contributed a smaller amount at a $1 billion valuation, with other VCs joining at the same price point, as per our reporting. TechCrunch was the first to announce Aaru’s financing, highlighting its tiered valuation approach.
This method allows coveted startups like Aaru to claim unicorn status—valued over $1 billion—despite a substantial part of their equity being acquired at a lower price. “It signals a fiercely competitive market for VC firms to secure deals,” stated Jason Shuman, general partner at Primary Ventures. “A large headline figure can also deter other VCs from backing the second or third contenders.”
The inflated headline valuation projects an image of a market leader, even if the average price paid by the leading VC was much less. Several investors informed TechCrunch that they hadn’t encountered a scenario where a lead investor divides their investment between two valuation tiers in a single round until recently.
According to Wesley Chan, co-founder and managing partner at FPV Ventures, this valuation strategy indicates bubble-like tendencies. “You can’t sell the same product at different prices, except in airlines,” he remarked.
Typically, founders offer discounts to top-tier VCs, as their involvement significantly attracts talent and future funding. With rounds often oversubscribed, startups have devised a way to handle excess interest: allowing eager investors to join immediately at a much higher price. These investors agree to the premium because it’s their only chance to secure a position on a highly sought-after cap table.
Another startup offering preferential pricing to its lead investor is Serval, an AI-driven IT help desk company, according to The Wall Street Journal. Although Sequoia’s initial entry price was at a $400 million valuation, Serval reported in December that its $75 million Series B valued the company at $1 billion.
While a high headline valuation can help with talent recruitment and attract corporate customers by suggesting a robust market position compared to competitors, the strategy has risks. Despite the true blended valuation being under $1 billion, these startups are expected to secure their next funding round at a value exceeding the headline figure; failing to do so results in a down round, warned Shuman.
These startups are in demand now, but potential challenges could make it challenging to justify their high valuations. A down round reduces employees’ and founders’ ownership stakes and may harm the trust of partners, customers, future investors, and potential hires.
Jack Selby, managing director at Thiel Capital and founder of Copper Sky Capital, cautions founders against pursuing extreme valuations, referencing the painful 2022 market correction as a warning. “If you put yourself on this high-wire act, it’s very easy to fall off,” he said.