In February, Glean announced funding around $200 million valuing the AI business software startup at $2.2 billion. Normally, the founder would leave the fundraiser after such a period. But these are not normal times, and Glean has the kind of meteoric revenue growth that lights up the eyes of VCs, more than tripling annual revenue last year.
Almost overnight, founder Arvind Jain’s inbox was flooded with cold emails from other investors – hungry for a piece of the startup unicorn.
“We keep telling people that, look, we just raised, we have a lot of money, and we feel healthy,” Jain said. He added, “But then something kept coming in, and at some point we said, OK, well, let’s not think about whether it makes sense to us.”
This month, Glean received another $260 million in funding from investors such as Altimeter Capital and DST Global, in a deal that increases its valuation to $4.6 billion.
The move is the latest in a series of recent funding rounds at record highs for a handful of AI startups in stark contrast to the overall market downturn for start.
“The pace of funding for top AI startups is very fast right now, with some raising multiple rounds within months,” said Steve Brotman, founder and managing partner of Alpha Partners. “This reflects the great investor excitement and FOMO surrounding AI, but it also creates risks of high valuations and unrealistic expectations.”
Search firm Perplexity raised $62.7 million in April, less than four months after it raised $73.6 million in a Series B round. And the round may not be done. In June, Bloomberg reported that it was in talks with SoftBank to invest at a price of $ 3 billion. A spokesman for Perplexity declined to comment.
Semiconductor company Groq is already exploring another high-profile investment opportunity shortly after it closed a $640 million Series D round in August, according to two people with knowledge of the matter. of this issue. A spokesman for Groq declined to comment.
Sakana AI, a Tokyo-based AI research company founded by Google engineers in 2023, announced this month that it has raised $100 million in Series A funding led by New Enterprise Associates, Khosla Ventures and Lux Capital . Earlier this year, Sakana raised $30 million in seed funding led by Lux Capital. Slingshot AI, which has built a mental health advisor, has also raised separate funding over several months.
“What happens after a lot of people don’t get in, so there might be billions of dollars on the side lined up for the next round,” said Gregg Hill, co-founder of Parkway Venture Capital, which invested in Figure AI. , a $2.6 billion robotics company. “I think that’s also why you’re seeing some of these cycles happen sooner rather than later.”
The haves and the have-nots
The speed at which these AI applications are raising new capital has created a new divide among tech founders. Unlike the tech boom that ended in 2020, where companies from crypto to consumerism were raising huge numbers, enthusiasm this time around is very focused.
“There’s a situation right now when you’re an emerging AI company, even though you probably haven’t proven anything in terms of revenue or massive user engagement, you can get incredible value ,” said Matt Murphy, a partner at Menlo Ventures. “At the same time, you can be a $50 million business right now that’s growing at 40%, and people might think you’re not interesting because you’re not an AI company. “
Dario Amodei is a former OpenAI employee turned Anthropic CEO. Kimberly White/Getty
Earlier this year, Anthropic, which has emerged as the closest competitor to OpenAI, closed a $750 million funding round led by Menlo Ventures, embracing the year in which it raised $7.3 billion.
It was the biggest check ever, and Murphy admits it felt “huge.” But he says it made sense given the company’s rocketship approach.
“It was one of those companies that I didn’t put in the 10%, but 1% year-over-year growth,” Murphy said. “It was amazing. I’ve never seen that before. So they deserve to be overpaid.”
Anthropic’s $18 billion valuation also made sense compared to OpenAI’s $86 billion hit at the same time in an agreement that allowed other operators to sell assets. (OpenAI is now reportedly seeking a $150 billion valuation.)
“There is a lack that there are only two places to invest if you want to invest in the heart and soul in the basis of the great speech of this wave, and the person is worth more than one hundred billion ,” Murphy said. “Whichever one it is, it seems like there’s probably something more to the investment.”
Pressure to make money one day
Even for AI startups, the pressure is on to show investors that their businesses will not only burn money but also, one day, make money.
Getty Images; Jenny Chang-Rodriguez/BI
According to Jain, a former Google engineer and co-founder of Rubrik, some of the startups that could have raised money out of the gate are now struggling to find a way to raise the capital needed to provide a return on investment. “They can’t go beyond proof of concept with their customers because ultimately they’re not adding value,” Jain said.
That puts too much investor attention, and pressure, on companies with business models that seem to work. “Suddenly, we entered this environment where there are now a number of AI companies that are really generating revenue, driving better user interaction, and adding value to the business,” Jain said. he said, “and we are one of them.”
Jai Das, president and partner at Sapphire Ventures, said he and a partner, Rajeev Dham, looked at Glean during the last round of fundraising but couldn’t find options to do a deal. By the time Glean went to raise money again, it had already surpassed the sales figures that Das had seen at the beginning of the year. In September, Sapphire entered the Series E company round.
“Glean didn’t make a promise,” Das said, “Glean produced the real kill.”
New challenges for founders and VCs
For founders of hot AI companies, there are certainly worse problems than VCs eager to kick in the door trying to give you more money.
“There’s a saying in VC that you raise money when you don’t need it,” Hill said. “Some of the best companies that ever came out of VC, like Uber, were always raising money because they were trying to disrupt the whole industry.”
Similarly, investors warn that having too much capital can be as dangerous as having too little, especially when companies have not yet achieved market capitalization.
“I understand from founders that it can often be a test because you want to strengthen your balance sheet and last 10 years but sometimes it’s not a good thing to last 10 years,” said Murphy. “Anytime you spend more money than a company, I think there’s a risk that the company can be reckless or take things for granted.”
Das, a Glean investor, said he never wants to tell a trader to turn down money because it is impossible to know if a catastrophic event is imminent. The outbreak of the coronavirus, for example, stopped the funding from starting in the first few months. However, he warns its founders that one of the dangers of raising a lot of money is spending it carelessly.
“If you’re a fast-growing company and people believe in what you’re doing, that’s great,” Das said. “I think what’s happening is people get a little carried away when you raise a lot of money and hire people without thinking about it. You’re doing things that aren’t important to the business.”
Even some founders are weary of the dangers of raising the bar for fast-tracking.
The founder of his artificial intelligence company, it took four months and 76 meetings to get the most money for his artificial intelligence company this year. He asked that his name not be mentioned as the circuit has not been announced yet.
After he got the money, the founder started selling. That’s when the cold emails started coming in. Three or four other partners in other firms came to him and told him that while he was wary of other competitors, they had spoken to customers who said they were taking their business when he started. Those investors became more interested home company.
However, the founder still chooses which meetings he takes. He worries that if he puts the last investor through, it will put a “red letter” on his company.
“They all talk to each other,” the founder said of the investors.
The financial crisis has also made the job of the venture capitalist more difficult, increasing the pressure to get distribution in hot deals but not overpaying.
“For VCs, this environment needs to work harder and move faster when evaluating AI deals,” said Alpha Partners’ Brotman. “There is pressure to make quick decisions with minimal effort. It also means the need to build strong relationships with founders earlier, before companies raise.”
But even if they can get into a hot company, keeping their property is more difficult than ever.
“VCs are constantly faced with requests from their hot AI companies to follow or double down on investment,” said Iris Sun, 500 Global investor. “This often leads to competition for pro-rata rights, and some companies implement pay-to-play arrangements. Failure to participate properly in these rounds can result in a significant reduction.”
However, some VCs say that ultimately their job hasn’t changed.
“This is not different from what I have seen in the past for other hypes,” said Sri Chandrasekar, managing partner of Point72 Private Investments. “My job is to separate the hype from the truth.”