Why AI Startups Are Selling the Same Equity at Two Different Prices
The AI startup scene is heating up, and a new strategy is emerging that could change the way we think about valuations.
In the past, the most sought-after companies raised multiple rounds of funding in quick succession, each at escalating valuations. But as competition intensifies, founders and VCs are employing novel valuation mechanisms to create the perception of market dominance. This new approach effectively combines two separate funding cycles into one, allowing startups to call themselves unicorns even when a significant portion of the equity is sold at a lower price.
Take Aaru, a synthetic-customer research startup. According to The Wall Street Journal, Redpoint led a round where it invested a large portion of its check at a $450 million valuation. Then, it invested a smaller portion at a $1 billion valuation, and other VCs joined at that same $1 billion price point. This multi-tiered valuation strategy is not uncommon, and it raises questions about the true value of the company.
'It is a sign that the market is incredibly competitive for venture capital firms to win deals,' said Jason Shuman, a general partner at Primary Ventures. 'If the headline number is huge, it’s also an incredible strategy to scare away other VCs from backing the number two and number three players.'
The massive 'headline' valuation creates the aura of a market winner, even though the lead VC’s average price was significantly lower. This tactic allows desirable startups to attract talent and future capital, but it also comes with risks. Even though the true, blended valuation for these startups is lower than $1 billion, they are expected to raise their next round at a valuation that is higher than the headline price; otherwise, it will be a punitive down round.
'You can’t sell the same product at two different prices. Only airlines can get away with this,' said Wesley Chan, co-founder and managing partner at FPV Ventures. 'In most cases, founders offer a discount to top-tier VCs because their involvement serves as a powerful market signal.'
But since these rounds are frequently oversubscribed, startups have found a way to accommodate the excess interest: Rather than turning away eager investors, they allow them to participate immediately, but at a significantly higher price. These investors are willing to pay that premium because it is the only way to secure a spot on a high-demand cap table.
Another startup that gave preferential pricing to its lead investor is Serval, an AI-powered IT help desk startup. While Sequoia’s lowest entry price was at a $400 million valuation, Serval announced in December that its $75 million Series B valued the company at $1 billion. This strategy can help recruit talent and attract corporate customers, but it also carries risks.
'If you put yourself on this high-wire act, it’s very easy to fall off,' warned Jack Selby, managing director at Thiel Capital and founder of Copper Sky Capital. 'These companies are in high demand now, but they may face unexpected challenges that will make it very hard for them to justify their high valuations.'
While the high 'headline' valuation can help recruit talent and attract corporate customers, the strategy is not without its risks. Even though the true, blended valuation for these startups is lower than $1 billion, they are expected to raise their next round at a valuation that is higher than the headline price; otherwise, it will be a punitive down round.
'It is a delicate balance, and founders must be cautious in their valuation strategies,' said Marina Temkin, a venture capital and startups reporter at TechCrunch. 'The market can be fickle, and a down round can have significant consequences for employees, founders, and future investors.'
This new valuation tactic is a symptom of bubble-like behavior, and it raises questions about the true value of AI startups. As the market continues to evolve, it will be interesting to see how this strategy plays out and whether it will become the new norm in the startup world.
