As competition among AI startups heats up, founders and VCs are turning to novel valuation mechanisms to manufacture a perception of market dominance.
Until recently, the most sought-after companies raised multiple rounds of funding in quick succession at escalating valuations. However, because constant fundraising distracts founders from building their products, lead VCs have devised a new pricing structure that effectively consolidates what would have been two separate funding cycles into one.
Recent rounds employing this scheme 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 Wall Street Journal reported. Redpoint then invested a smaller portion at a $1 billion valuation, and other VCs joined at that same $1 billion price point, according to our reporting. TechCrunch was the first to report Aaru’s financing, including its multi-tiered valuation.
The approach allows desirable startups like Aaru to call themselves a unicorn — valued at more than $1 billion — even though a significant portion of the equity was acquired at a lower price.
“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.
Multiple investors told TechCrunch that until recently, they had never encountered a deal where a lead investor splits their capital between two different valuation tiers in a single round.
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