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Welcome back! I’ve been hearing a lot about how intense competition is for Series A investments lately. Investors that typically look to invest in more mature startups, say at the Series B or above rounds, are crowding into Series A rounds for fear of missing the next major winner. Like much else these days, artificial intelligence gets the credit (or blame) for this new dynamic. Venture capitalists are watching revenues triple or quadruple over a year, or less, at AI application startups such as Suno or coding assistant developers like Lovable. Funding rounds that used to happen every year or two are happening within three months of each other, as our scoop on Applied Compute shows. That’s pushed later stage investors to elbow into early investments. And the size and valuation of these investments has also ballooned. Ethan Choi, a partner at Khosla Ventures focused on growth stage investments, recently invested in a $90 million-sized Series A round for an AI enterprise software startup DualEntry at a $415 million valuation. That’s much higher than the average $71 million valuation for Series A rounds last year, according to PitchBook. “There’s this trade off between going early and taking on more risk, and trying to manage absolute valuations,” said Choi. It’s been so competitive to invest early in AI startups because their valuations can soar so fast if the team is technical or sitting on top of important research. “There’s an onus to be a better picker, find these founders earlier, and have done your market work to have higher conviction earlier,” said Choi. As they fight to invest, venture capitalists are struggling to get meaningful percentages in the AI companies they back. While a venture firm may normally opt for between a 10% to 20% stake in a business for a first round, some have had to accept single-digit, or in some cases, a fraction of a stake in order to be part of the cap table, I reported last week in my profile about Benchmark Capital. To be clear: a Series A financing round has always been a venture firm’s opportunity to get meaningful, board-level ownership in the business. Unlike a seed round, Series A rounds often set the company’s first formal valuation and ownership structure, such as a board of directors. The other example of firms struggling to get meaningful ownership is the rise of firms investing in a startup through employee share sales. Earlier this week, my colleagues Anissa Gardizy, Sri Muppudi and I reported that Crusoe is in the midst of finalizing a $120 million share sale for early employees: investors will buy the stock from employees at a 30% higher price to the cloud and data center company’s valuation in a fundraising announced late last month. In these transactions, investors are often getting common shares, not preferred shares. Those shares come with different rights: if a distressed sale was to happen, for example, preferred shares are more likely to get paid out. Common shares also do not come with the same information rights as preferred shares. But it’s increasingly a trade-off that investors are willing to make if it means they can get exposure to an AI company. In other news, here are three fund scoops: Regardless of where investors choose to focus, there is certainly more capital flowing into the early stage investing. Altimeter’s growth arm has filed paperwork indicating that it is raising a $1.5 billion growth fund, according to a securities filing. Last year, Altimeter Venture Partners, the venture capital affiliate of investment firm Altimeter Capital Management, raised $552.6 million for its seventh fund, according to a securities filing. Altimeter has invested in OpenAI, Snowflake, Plaid and Roblox. Bryan Rosenblatt, a partner at Craft Ventures, is planning to leave the firm at the end of the year, according to a person with knowledge of the matter. He is starting a new firm, called Sandlot, as a solo general partner to back seed and pre-seed stage startups across all sectors, including artificial intelligence, enterprise and consumer startups. The firm is targeting a $50 million close. The fund and existence of the fund has not been previously reported. Former Khosla Ventures partner Sandhya Venkatachalam left the early-stage focused firm last year to launch her own fund herself. She has raised $35 million of her $50 million target so far, according to a securities filing. The fund will invest in pre-seed startups and has already made 14 investments, according to a person with direct knowledge of the firm’s activity.
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