AI startups with little or no revenue are increasingly raising money through tranched funding rounds that allow different investors to buy into the same company at sharply different valuations, helping founders secure large headline valuations early in their life cycle. One prominent example is Ineffable Intelligence, the new venture founded by former Google DeepMind scientist David Silver, which raised $1.1 billion in seed financing and was widely described as carrying a valuation above $5 billion. Company filings show the financing was split into two parts: an initial $11 million round valuing the company at about $55 million pre-money, followed weeks later by roughly $1.1 billion raised at a $4 billion pre-money valuation from investors including Lightspeed, Index Ventures and DST Global. The structure gave early backers a far lower entry price than later investors paid.
Such arrangements have become more common in the rush to finance frontier AI research, particularly among so-called AI labs that require heavy spending on GPUs and computing infrastructure before they have commercial products. Investors and founders say the structure can serve both sides: lead firms can obtain better terms in exchange for backing a company early, while startups can announce eye-catching valuations that may help attract talent, partners and future capital. Venture investors cited in the debate say the reported top-line valuation often obscures a more nuanced blended valuation across tranches. Jaya Gupta of Foundation Capital argued that in a market driven heavily by momentum, the headline number can carry outsized value, while Sequoia partner Shaun Maguire said it is unfair to portray the practice as deceptive when later investors are simply willing to pay far more for a sought-after AI company than some firms are prepared to pay.
Critics contend the approach can distort how employees, smaller investors and the broader market perceive a startup's true worth. Brendan Foody, chief executive of Mercor, criticized the practice in a social media post, alleging that founders and investors often emphasize only the higher valuation. Gupta also warned that workers joining after a financing announcement may receive stock options with strike prices closer to the upper valuation, leaving them with more downside risk and less upside than headline figures imply. Some investors cited in the discussion said frenzied demand for exposure to leading AI companies has enabled valuation-maximizing behavior, and argued that certain buyers may be willing to pay up partly because they expect to resell stakes later at even higher prices.
The dispute over private-market valuations is unfolding against a wider argument over whether AI investment returns will justify current pricing across technology and financial markets. Nils Rode, chief investment officer at Schroders Capital, said AI's greatest value in private equity is likely to come not from reducing headcount but from improving investment selection, helping firms identify more winners and avoid more failed deals. He said tools embedded in diligence and investment committee work can deepen analysis while remaining under human oversight. By contrast, Apollo Global Management chief economist Torsten Sløk has warned that a mismatch may be developing between aggressive market valuations and the slower pace at which AI-driven profits may emerge outside the tech sector. He said many industries adopt change slowly and may take years to realize returns, raising the risk of a painful repricing if investors continue to assume near-term earnings gains.
That broader skepticism has also surfaced internationally. Bloomberg reported that Chinese hedge fund managers at Wealspring Asset and Shanghai Banxia Investment Management Center have described the global AI stock surge as a potential bubble, with one calling it a 'super bubble' and another saying signs of a trigger for a burst had already appeared. Even so, capital continues to flow into the sector, from venture firms and corporate backers to public institutions. Ineffable Intelligence's investors include the United Kingdom's Sovereign AI fund and the British Business Bank, though it remains unclear at which valuation they participated. The result is an AI market where enthusiasm for transformative potential continues to support extraordinary fundraising, even as questions intensify over how those valuations are set and when the underlying returns will materialize.