The AI Seed Effect: Why Early-Stage Valuations Are Exploding

Pete Martin recollects securing a $5 million seed round at a $25 million post-money valuation for Realm, his AI-driven cybersecurity company, way back in 2024—what now feels like a thousand “AI years” ago.

He noted that such an appraisal seemed substantial for that capital at the time. Yet today, “it’s quite standard” to witness a $10 million seed round achieving a $40 million to $45 million post-money valuation, he stated, particularly if you are an AI enterprise. 

In truth, that phenomenon occurs solely if you are an AI company, as investors are showing scant interest in other ventures.

At the most recent Y Combinator Demo Day, held in March, widespread discussion revolved around the elevated pricing of the companies, stated Ashley Smith, a general partner at the early-stage fund Vermilion. Many startups had already secured six- to seven-figure client agreements, including a firm that was merely eight weeks old, she mentioned, leading some companies to request $5 million for a $40 million post-money valuation.

This time, she believed, it surpassed the so-called “YC tax,” which signifies the premium an investor is willing to pay simply because the startup went through YC. Even with those initial revenue numbers, Smith observed that investors in this market are valuing rounds “years ahead of traction.”

Major venture firms, flush with capital, are also moving into rounds earlier, inflating startup prices and valuations in hopes of cashing in big if these companies exit or IPO one day. Smaller VC firms, too, possess an insatiable appetite for AI companies. As an investor specializing in AI infrastructure, Smith noted she can easily find herself priced out of a round, especially when a larger firm intervenes. That’s one reason why the seed deal count is down but valuations are up, a trend both founders and VCs affirmed, and data from Carta corroborates.

Shanea Leven, founder of the enterprise AI application platform Empromptu, attributes this to Cursor, which, in early 2025, achieved $100 million in revenue in just 12 months. It was among the initial high-profile AI companies to elevate the standard for how swiftly these startups could gain momentum, although it was certainly not the sole instance. Others include Lovable, Bolt, OpenEvidence, ElevenLabs, all touting their rapid traction. Though these are outliers, it’s challenging for some not to feel the reverberated intensity.

“Investors are now anticipating that,” she stated. “The pressure is at an unprecedented high, not to become a billion-dollar company, but a $50 billion one.” 

Accelerated Momentum, Elevated Appraisals

VCs are prompt to defend the reasoning behind rising seed valuations. For instance, Marlon Nichols, managing general partner at MaC Ventures, said the evidence lies in immediate traction, which propels seed pricing. When he established his firm back in 2019, he noted his average entry check was $2.5 million. Today, it stands at $5 million. 

“The premier seed-stage companies no longer resemble traditional seed-stage companies,” he observed. The advancement of AI tools means that founders can develop minimal viable products and secure early customers more rapidly than ever before, even among large enterprises, which are eagerly seeking ways to deploy AI.

Nichols’ two most recent seed investments were already yielding over $2 million in revenue, complete with “paid pilot programs from large enterprises” and “a clear pathway to full commercial agreements.” He issued checks ranging between $3 million and $4 million, and agreed to appraise the startups at $25 million and $30 million post-money, respectively, which is a significantly higher amount compared to just a few years ago.

The founders’ backgrounds also factored into his term-sheet offers. “They possessed pertinent experience” and “a proven track record of execution,” he said, “which substantially lessened much of that early-stage risk.”

Moreover, investors are prepared to pay exorbitant premiums for proven AI talent, favoring serial founders or those with the appropriate pedigree from a reputable prior employer (like OpenAI). This, too, universally elevates projected valuations.

“There’s an intense competition for top researchers at present, and I don’t deem it good or bad; it’s simply the current market reality,” Amber Atherton, a partner at the early-stage consumer fund Patron, remarked. 

That’s what is propelling the most extreme seed valuations, like ex-OpenAI executive Mira Murati’s $2 billion seed funding for Thinking Machine Labs at a $12 billion valuation. 

Leven, a serial founder, indicated that her current startup’s valuation at this phase is double that of her initial venture at an equivalent point. Her latest company is not only focused on AI, but it also boasts significantly more traction than her previous startup did at this time, showcasing the rapid growth potential of new enterprises like hers. 

“I currently hold multiple six-figure contracts and am nearing completion on a seven-figure one. You must achieve that to secure funding,” Leven asserted. “A friend of mine is pursuing a similar funding round, not in AI, and it took her two years versus my three weeks, to obtain half of what I did.” 

Pre-Seed: The New Foundational Investment

Seed VCs, including Vermilion’s Smith, are managing the escalation in seed valuations by undertaking more pre-seed deals. Pre-seed startups are essentially the type of nascent companies that seed companies used to be years ago: extremely early and pre-revenue.

Jonathan Lehr, a general partner at Work-Bench, is investing from a $160 million fund predominantly focused on seed rounds, though he noted the firm has grown “increasingly comfortable” participating at the pre-seed stage as companies now scale significantly faster.

It’s growing more frequent to see investors allocate capital to startups at an earlier stage, as heightened exposure is simply the cost of “accessing companies with the potential to scale more swiftly and become category leaders,”  Lehr explained.

Atherton, meanwhile, shared that to secure a share of these promising early-stage startups, the typical investment amount for her firm’s $100 million Fund II now ranges from $4 million to $5 million, an increase from the $1 million to $2 million for its $90 million Fund I.

“AI has significantly elevated the bar for founders, requiring them to have a live product with users and revenue straight out of the gate,” she observed.  “Investors must act faster and underwrite real-world traction much earlier because the best founders are shipping products with users and revenue almost immediately.”

Thus, seed VCs are no longer “backing ideas,” but rather “supporting early evidence of genuine consumer product demand,” she articulated. Seed VCs are also accelerating their pace, moving “from slow diligence to high-conviction decisions regarding distribution, retention, and founder’s acumen.” 

However, There’s a Catch

As the stakes have grown, so too have investors’ anticipations. 

It is no longer adequate, Atherton

It was stated that for a business to merely construct and deliver a product is insufficient. Such a task is commonplace nowadays. The emphasis isn’t even on market adoption, although significant growth is quite beneficial. Instead, it’s centered on the future, the compelling narrative entrepreneurs can articulate about how they will outperform all competitors and conquer the market. This forward-looking perspective is what these early-stage venture capitalists believe will propel these nascent enterprises into enduring, multi-billion dollar corporations, or at the very least, ensure a profitable divestiture.

“Individuals are simply striving to withstand the pressure,” Leven remarked. “Otherwise, you won’t possess adequate capital for expansion, nor to genuinely compete.” 

A key advantage for founders securing substantial funding in the initial phases is enabling the company to accelerate operations and recruit high-caliber personnel. Venture capitalists understand, as they formulate their investment terms, that talent in the age of Artificial Intelligence is costly, as is the operation of the underlying AI models that power these startups, and competing with other richly capitalized rivals—some being established SaaS behemoths already valued in the billions.

According to Leven, everyone is attempting to replicate the successful outcome of Google acquiring Wiz. However, the inherent risk is also elevated. Founders are obligated to expand their companies into ventures that vindicate the lofty early valuations before they necessitate additional capital. Series A investors are similarly anticipating more substantial growth, quicker progress, and greater achievements.

Nichols and his firm are currently underwriting an unprecedented number of nascent companies, with the renewed expectation that they will achieve their key objectives within approximately 18 months. “Such rigorous adherence to targets is as crucial as investing in successful ventures,” he stated.

Elevated early-stage valuations imply a reduced margin for mistakes, Lehr commented, further stating: “Less scope for exploratory work, diminished patience for strategic shifts, and increased examination if advancement fails to align with the funding secured.” 

Martin, the cybersecurity entrepreneur, successfully secured his Series A funding late last year, noting that his company comfortably met the required criteria. Yet, he also offered a caution to fellow entrepreneurs.

“One risks becoming trapped in an intermediate position,” Martin explained. “Being perceived as overly pricey by prospective investors, yet lacking the demonstrated progress to validate further funding.”