AI startups use multi-tiered valuations to manufacture unicorn status

Venture capital firms and founders are adopting novel valuation mechanisms to create a perception of market dominance. In these multi-tiered funding rounds, startups split capital between lower and higher valuation tiers in a single cycle. For example, synthetic-customer research startup Aaru raised a Series A round led by Redpoint. The Wall Street Journal reported that Redpoint invested a large portion of its check at a $450 million valuation. Redpoint then invested a smaller portion at a $1 billion valuation, and other venture capital firms joined at that same $1 billion price point. This structure allows startups like Aaru to call themselves a unicorn—defined as a startup valued at more than $1 billion—even though a significant portion of the equity was acquired at a lower price. Serval, an AI-powered IT help desk startup, announced in December that its $75 million Series B valued the company at $1 billion, though Sequoia’s lowest entry price was at a $400 million valuation, according to The Wall Street Journal.

This pricing structure effectively consolidates what would have been two separate funding cycles into one. Startups frequently use this method to accommodate excess investor interest. Rather than turning away eager investors, they allow them to participate immediately on the cap table—or capitalization table—but at a significantly higher price. According to Jason Shuman, a general partner at Primary Ventures, the market is incredibly competitive for venture capital firms to win deals. Shuman noted that a huge headline number is an incredible strategy to scare away other venture capitalists from backing competitors.

Multiple investors told TechCrunch that until recently, they had never encountered a deal where a lead investor splits capital between two different valuation tiers in a single round. Wesley Chan, co-founder and managing partner at FPV Ventures, views this tactic as a symptom of bubble-like behavior, comparing it to airlines selling the same product at different prices. The strategy carries significant risks because the true, blended valuation for these startups is lower than the $1 billion headline figure. Shuman pointed out that these companies are expected to raise their next round at a valuation higher than the headline price; otherwise, they will face a punitive down round—a funding round where a company is valued at a lower price than in previous rounds. These companies may face unexpected challenges that will make it very hard to justify their high valuations. Jack Selby, managing director at Thiel Capital and managing partner at Copper Sky, warned that chasing extreme valuations is a dangerous game, pointing to the 2022 market reset. “If you put yourself on this high-wire act, it’s very easy to fall off,” Selby said.

Why it matters

AI startups are increasingly using multi-tiered valuation rounds to maintain unicorn status and manage investor demand, a strategy that creates risks for future fundraising and employee equity.