Pete Martin recalls raising a $5 million seed round at a $25 million post-money valuation for his AI-powered cybersecurity company, Realm, in 2024, a time that feels like ages ago in the rapidly evolving AI landscape.
At that time, the valuation appeared elevated. However, Martin observes that a $10 million seed round at a $40 million to $45 million post-money valuation has become quite common today, particularly for AI ventures.
Such valuations seem to apply predominantly to AI companies, as investors have shown a marked preference for this sector over others. During the latest Y Combinator Demo Day in March, Ashley Smith, a general partner at Vermilion, noted that the conversation revolved around inflated valuations. Startups were securing six- to seven-figure customer contracts, including one company that was merely eight weeks old, prompting some to request $5 million at a $40 million post-money valuation.
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This trend extends beyond the perceived “YC tax,” which reflects the additional premium investors are willing to pay for startups associated with Y Combinator. Smith indicated that even with promising early revenue numbers, investors are pricing rounds far ahead of actual traction.
Major venture capital firms, buoyed by liquidity, are increasingly entering funding rounds at earlier stages. This has led to escalating prices and valuations, with the hope of significant returns should these companies achieve successful exits or public offerings. Smaller VC firms are equally hungry for AI firms, and as Smith noted, the competition can push her out of rounds, a factor contributing to fewer seed deals despite rising valuations, according to data from Carta.
Shanea Leven, founder of the enterprise AI platform Empromptu, cites the remarkable rise of Cursor, which reached $100 million in revenue within 12 months. This milestone has substantially raised expectations for how quickly startups can gain traction. While such rapid growth remains exceptional, it has created pressure across the board. “The investors are expecting that now,” Leven stated, pointing out that the pressure now revolves around achieving valuations of $50 billion, rather than just reaching the billion-dollar mark.
Rising Expectations for Early Success
Venture capitalists justify the surge in seed valuations by highlighting early traction. Marlon Nichols, managing general partner at MaC Ventures, noted that early-stage companies are no longer comparable to traditional seed ventures. With advancements in AI tools, founders can develop minimum viable products and attract initial customers at unprecedented speeds.
Nichols shared that his most recent seed investments were already generating over $2 million in revenue and had established “paid pilots from large enterprises” alongside the potential for full commercial agreements. He has been willing to invest between $3 million and $4 million, valuing these startups at $25 million to $30 million post-money—remarkably high compared to past standards.
The backgrounds of founders also weigh heavily on investment decisions. Nichols emphasizes the advantage of experience and execution history, which significantly mitigates early-stage risks. Meanwhile, there’s heightened competition for proven AI talent, particularly among second-time founders or those from well-regarded firms like OpenAI, further influencing expected valuations.
Amber Atherton, a partner at Patron, recognizes that this competitive landscape is driving extremely high seed valuations. Notable examples include Mira Murati, formerly of OpenAI, who achieved a $12 billion valuation for Thinking Machine Labs during its seed round.
Leven, drawing a comparison to her previous venture, noted that her current startup’s valuation at the same stage is double that of her first, bolstered by far greater traction. “You have to have that to raise,” she explained, underscoring the stark difference in timelines for securing funding between AI and non-AI startups.
Shift to Pre-Seed Investments
In response to rising seed valuations, venture capitalists like Smith from Vermilion are increasingly engaging in pre-seed investments. These pre-seed startups are akin to the nascent ventures that characterized seed investments years ago—early-stage and often pre-revenue.
Jonathan Lehr, a general partner at Work-Bench, emphasized that his firm, which primarily focuses on seed rounds from a $160 million fund, is gradually becoming more comfortable with pre-seed investments. He highlighted a trend where investors are committing capital earlier in search of potential scale and market leadership.
Atherton pointed out that her firm’s average check size has adjusted accordingly, rising from $1 to $2 million to between $4 million and $5 million. “AI has raised the bar that much higher,” she noted, emphasizing the necessity for founders to present live products with users and revenue right from the start.
These shifts mean that seed VCs are now backing early signs of consumer product demand rather than mere ideas, moving quickly from lengthy diligence to rapid, conviction-based decisions on aspects like distribution and retention.
Navigating Increased Pressures
As expectations rise, investors are also demanding more from companies. Atherton remarked that it’s no longer sufficient for a startup to merely build and launch a product; the narrative surrounding future execution capabilities is becoming critical. Seed VCs are looking for assurances that these companies can become enduring, profitable entities.
“The pressure is at an all-time high,” Leven added, explaining that founders must secure enough funding to compete effectively. While raising substantial amounts of capital can facilitate rapid growth and attract top talent, investors are mindful of the increasing costs associated with AI development and the competitive landscape with established SaaS companies.
Leven mentioned an industry-wide attempt to replicate success stories like Google’s acquisition of Wiz, but noted that the associated risks are elevated. Founders face the challenge of justifying high early valuations as they approach subsequent funding rounds, where expectations for growth are even more stringent.
Nichols acknowledged that the current focus requires startups to meet milestones within 18 months, emphasizing that this discipline is crucial for backing potential winners. Increasing seed valuations create a tighter margin for error, leading to less room for experimentation and heightened scrutiny of progress against the capital raised.
Martin, the cybersecurity entrepreneur, successfully navigated his Series A funding late last year, but he cautioned founders about the fine line they tread: “You can end up stuck in between,” he warned, highlighting the challenge of being too expensive for new investors without the traction to substantiate the next round of funding.