Pete Martin recalls raising a $5 million seed round at a $25 million valuation after money for his AI-powered cybersecurity company Realm in 2024, aka a thousand “AI years” ago.
That valuation seemed high for that amount at the time, he recalls. But today, “it’s pretty typical” to see a $10 million round at a $40 million to $45 million post-money valuation, he said, especially if you’re an AI company.
In fact, this kind of thing only happens if you are an AI company, as investors show little interest in anything else.
At Y Combinator’s most recent Demo Day in March, everyone was talking about how high the companies were priced, said Ashley Smith, general partner at seed-stage fund Vermilion. Many startups already had six- to seven-figure client contracts, including one company that was just eight weeks old, he said, so there were companies asking for $5 million with $40 million in postage.
This time, it was more than the so-called “YC tax,” meaning how much more an investor is willing to pay just because the startup went through YC, he believed. Even with these early revenue numbers, Smith said investors in this market are pricing rounds “years before traction.”
Big venture capital firms, flush with cash, are also moving in cycles earlier, raising IPOs and valuations in hopes of cashing in big profits if those companies exit or IPO one day. Smaller VC firms also have an insatiable appetite for AI companies. As an investor focused on AI infrastructure, Smith said she can easily find herself priced out of a round, especially when a larger company enters. That’s one reason because the number of seed agreements is reduced but valuations are inflated, both founders and VCs said, and data from Carta shows that.
Shanea Leven, founder of enterprise AI application platform Impromptu, blames Cursor, which, in early 2025, hit $100 million in revenue in just 12 months. It was one of the first high-profile AI companies to raise the bar for how quickly these startups could win, though it certainly wasn’t the only one. Others include Lovable, Bolt, OpenEvidence, ElevenLabs, which boast of their fast uptake. While these are extreme, it is hard for some not to feel the reverberating heat.
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“Investors are expecting it now,” he said. “The pressure is at an all-time high, not to be a billion dollar company, but to be a $50 billion company.”
Faster traction, bigger valuations
VCs are quick to defend the rationale of rising seed valuations. For example, Marlon Nichols, general partner at MaC Ventures, said the proof is in the form of traction right out of the gate, driving seed pricing. When he started his company in 2019, he said his average incoming check was $2.5 million. Today, it’s $5 million.
“The best manufacturing companies don’t look like traditional startups anymore,” he said. Advances in AI tools mean founders can get to minimum viable products and get early customers faster than ever before, even among large enterprises, which are eagerly looking for ways to use AI.
Nichols’ last two investments have already grossed more than $2 million, with “big business paid pilots” and “a clear line of sight for full commercial deals.” He cut checks for between $3 million and $4 million and agreed to value the startups at $25 million and $30 million after money, respectively, which is a lot compared to a few years ago.
The background of the founders also played a role in his tenure bids. “They had relevant experience” and “a track record of execution,” he said, “which greatly reduced that risk at an early stage.”
Additionally, investors are willing to pay astronomical premiums for proven AI talent, favoring second-line founders or those with the right pedigree from the right previous employer (like OpenAI). This also highlights expected valuations across sectors.
“There’s a war for great researchers right now, and I don’t think it’s good or bad; it’s just the current state of the market,” said Amber Atherton, a partner at early-stage consumer fund Patron.
That’s what drives the most extreme startup valuations, like ex-OpenAI Mira Murati’s $2 billion price tag for Thinking Machine Labs, which is valued at $12 billion.
Leven, a second founder, said her startup’s valuation at this stage is double that of her first at a similar stage. Not only is it her latest AI company, but it also has much more traction than her previous startup right now, showing how quickly new companies like hers can grow.
“Right now I have multiple six-figure contracts, I’m currently closing in on seven figures. You have to have that to raise,” Leven said. “A friend of mine does a similar cycle, not AI, and it took her two years versus my three weeks to get half of what I got.”
Pre-seed is the new seed
Seed VCs like Vermilion’s Smith are tackling rising seed valuations by doing more pre-seed deals. Startup startups are the kind of startups that startups were years ago: very early, pre-revenue.
Jonathan Lehr, a general partner at Work-Bench, is investing from a $160 million fund focused primarily on seed rounds, though he said the firm has become “increasingly comfortable” going into pre-seed as companies scale much faster.
It’s more common to see investors pour capital into startups earlier, as the increased exposure is simply the price of “access to companies that have the ability to scale faster and become category leaders,” Lehr described.
Atherton, meanwhile, said she will get a piece of these promising early-stage startups, with the average check size for her firm’s $100 million Fund II now in the $4 million to $5 million range, up from $1 million to $2 million for the $90 million Fund I.
“AI has raised the bar much higher for founders to have a live product with users and revenue straight out of the gate,” he said. “Investors need to move faster and get real-world traction much sooner because the best founders ship products with users and revenue almost immediately.”
So seed VCs are no longer “backing ideas,” they are “backing the first evidence of real demand for consumer products,” he described. Seed VCs are also moving faster, “from slow due diligence to high-conviction decisions about distribution, retention and founder taste.”
But there is a catch
As the stakes have risen, so have investors’ expectations.
It’s no longer enough, Atherton said, for a company to simply manufacture and ship a product. Anyone can do it these days. It’s not even about traction, although that helps a lot. It is about the future, the founders of the story can tell about how they will be able to perform better than everyone else and beat everyone in the market. This is what these seed VCs believe will lead these startups to resilient $50B+ companies, or at least some sort of profitable exit.
“People are just trying to survive the pressure,” Leven said. “Otherwise, you won’t have enough money to grow, to really compete.”
The good part about raising a lot of money in the early stages as a founder is that it helps the company to move quickly and hire expensive talent. VCs know, as they price their term sheets, that talent in the age of AI is expensive, as is running the AI models that underpin these startups, and competing with other well-capitalized competitors, sometimes large SaaS competitors already worth billions.
Everyone, Leven said, is trying to recreate the magic of Google’s purchase of Wiz. But the risk is also higher. Founders need to grow their companies into businesses that justify high early valuations before they need more cash. Series A investors also expect bigger, faster and more.
Nichols and his company are now taking on more new companies than ever before, with the new expectation that they will achieve their milestones within about 18 months. “That discipline is just as important as backing the winners,” he said.
Higher startup valuations mean less margin for error, Lehr said, adding, “Less room for experimentation, less tolerance for pivots and more scrutiny if progress doesn’t match capital raised.”
Martin, the cybersecurity founder, successfully raised its Series A late last year, saying the benchmark was not problematic for liquidating his company. But he too had a warning for the founders.
“You might end up stuck in the middle,” Martin said. “Too expensive for new investors, but without the traction to justify the next round.”
