AI Startups Juice Values With Novel Fundraising Tactic

“AI startup Serval closed a private deal with venture-capital giant Sequoia in December that valued it at less than $400 million. Days later, Serval announced a new milestone from another funding round.

 

This time, its valuation had topped $1 billion, giving it Silicon Valley's coveted "unicorn" status.

 

Serval's $600 million valuation surge in less than a week is an example of a fundraising tactic that has grown increasingly popular for sought-after startups and top-tier venture-capital firms in recent months.

 

A startup sells a stake of its company to a leading investor at one valuation and, either soon after or at the same time, offers additional shares to other backers at a much higher valuation.

 

The result: The leading investor books a massive gain, at least on paper, and the startup can announce and publicize a much higher value.

 

Startups have long commanded lofty valuations that have generally been less rooted in the strict dollars-and-cents metrics investors use to evaluate publicly traded companies. In some ways, a company is worth whatever an investor is willing to pay for it.

 

But several VC investors and outside accounting professionals said the back-to-back or multitiered deals are novel and raise questions about how much startups are really worth in an age of frenzied artificial-intelligence investing.

 

The practice "absolutely does inflate valuations," said Chris Douvos, founder of AHOY Capital, a fund of funds that invests in venture-capital firms. "Founders and investors have the ability to weaponize a startup's balance sheet and make these huge investments at huge valuations to try to anoint a winner and suck all the air out of the room."

 

The frequency of such funding deals increased in the fourth quarter of last year, and about 20 of them occurred in the last six to 12 months, according to Carta, a financial-software provider that works with tens of thousands of startups. More are on the way, according to investors, founders and accounting professionals that work with startups.

 

The rising trend of these deals points to a shift in market sentiment. A year ago, founders could dictate most of the terms for investing as venture capitalists scrambled to spread their bets across a landscape of emerging AI companies. The fact that investors in some cases are able to structure deals like this for themselves indicates that the market has cooled slightly for some companies, some investors and startup evaluators said.

 

"Here's a way to still make it look like you have a high valuation" while a lead investor gets a cheaper price, said Peter Wendell, founder of venture firm Sierra Ventures, who now co-teaches a course at Stanford University's Graduate School of Business on venture capital with Eric Schmidt, Google's ex-CEO. "The founder or the CEO are trying to create the highest possible appearance of value."

 

Serval and Sequoia celebrated the $1 billion fundraising milestone in a slickly produced, podcast-style video. They extolled the company's business, which uses AI to help customers automate help-desk requests and other tasks.

 

"The answer is easy," Sequoia partner Anas Biad says in the video. "The answer is Serval."

 

Serval was valued at about $220 million in October, PitchBook data show. During that same month, the startup had $1 million in annual recurring revenue, according to people familiar with the matter. After the back-to-back rounds in December, employees sold shares at a valuation of $1.2 billion, the people said.

 

Aaru is another startup, founded in March 2024, that got a $1 billion headline valuation through a deal involving multiple investment tiers. Half of the investors in the recent round bought shares that priced the company at $450 million, and the other half purchased equity priced at $1 billion, according to people familiar with the matter.

 

Attorneys specializing in startup financing said the fundraising method is legal and can offer incentives for venture-capital players to back new companies. However, some investors said they would decline to participate in such deals.

 

"Most of the VCs I interface with, they would not do a deal nor would they participate in a deal where some investors would get dramatically better terms at the same time," said John Chambers, former chief executive of Cisco Systems who is now a venture capitalist.

 

Fundraising rounds can affect employee compensation packages, said Previn Waas, a partner focused on software companies and initial public offerings at Deloitte. Typically, startup employees are given stock options as part of their compensation packages. The options give recipients a right to buy company stock at a set price, which is called the exercise price or strike price.

 

A higher headline valuation can raise the strike price for employees. And the higher that price is, the less money the recipient can potentially make someday by exercising those options.

 

However, soaring valuations can also lift the wealth of company employees substantially.

 

The publicity surrounding a successful fundraising round, especially one in which a startup reaches a $1 billion valuation, can help provide momentum. Startups locked in ferocious competition with rivals can gain recognition quickly as the biggest company within a certain arena.

 

Potential customers and prospective employees might look to a startup's "headline valuation" as a positive signal for the company's future. It is also likely to help recruit top-tier employees.

 

"Recruiting is easier if you can flash to potential employees that my company is of a billion unicorn status," said Ernestine Fu, an investor at Brave Capital who has worked on a number of these deals for early stage startups in recent months.” [1]

 

1. AI Startups Juice Values With Novel Fundraising Tactic. Au-Yeung, Angel.  Wall Street Journal, Eastern edition; New York, N.Y.. 24 Feb 2026: A1.