The fundraising tactic AI startups are using to juice valuations

Subscribe to enjoy similar stories. 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