Pete Martin remembers raising a $5 million seed round for AI-powered cybersecurity company Realm at a $25 million post-money valuation in 2024, the millennium of the “Year of AI.”
He recalled that the valuation was high for the amount at the time. But now, he said, it's “very common” to see $10 million seed rounds at post-money valuations of $40 million to $45 million, especially for AI companies.
In reality, that only happens in the case of AI companies, as investors care little about anything else.
At the most recent Y Combinator Demo Day in March, everyone was talking about how expensive the companies were, said Ashley Smith, general partner at early-stage fund Vermilion. He said many startups had already secured six- to seven-figure customer contracts, including some that were just eight weeks old, so some were asking for $5 million post-$40 million.
She believed this tax was more than the so-called “YC tax” and meant investors were willing to pay more just because a startup passed YC. Despite these early revenue numbers, Smith said investors in this market are pricing in rounds “years in advance of traction.”
Large, well-funded venture firms are also moving into rounds early, driving up startup prices and valuations in hopes of making a fortune if those companies eventually exit or go public. Smaller VC firms also have an insatiable appetite for AI companies. Smith, an investor focused on AI infrastructure, said he often gets priced out of rounds, especially when large companies come in. This is one reason why valuations are rising even as the number of seed deals is falling, both founders and venture capitalists say, and Carta's data shows that.
Shanea Leven, founder of enterprise AI application platform Empromptu, blames Cursor for reaching $100 million in revenue in just 12 months in early 2025. The company was one of the first high-profile AI companies to raise the bar for how quickly these startups could gain traction, but it certainly wasn't the only one. Others include Lovable, Bolt, OpenEvidence, and ElementalLabs, all of which are enjoying fast traction. These are abnormal values, but some people may not feel the lingering heat.
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“Investors expect that now,” she says. “The pressure to become a $50 billion company instead of a $1 billion company has never been greater.”
Faster traction, bigger valuation
Venture capitalists are quick to defend the rationale for rising seed valuations. For example, Marlon Nichols, managing general partner at MaC Ventures, said the evidence is quickly gaining traction and driving up seed prices. When he started the company in 2019, the average joining check was $2.5 million, he said. Today it's $5 million.
“The best seed-stage companies no longer look like traditional seed-stage companies,” he said. Advances in AI tools mean that founders can get a minimum viable product and gain early customers faster than ever before, even among large enterprises eager to find ways to implement AI.
Nichols' two previous seed investments had already generated more than $2 million in revenue, with “paid pilots from large companies” and “clear prospects for full commercial agreements.” He agreed to cut the checks between $3 million and $4 million, valuing the startups at $25 million and $30 million, respectively. This is higher than it was a few years ago.
The founder's background also influenced his term sheet proposal. “They have the right experience” and a “track record of execution,” he said, “which greatly reduces the risk in the early stages.”
Additionally, investors are willing to pay an astronomical premium for proven AI talent, favoring second-time founders and those with the right pedigree from the right previous employer (such as OpenAI). This also raises the overall expected valuation.
“There's a lot of competition for great researchers right now, but I don't think that's good or bad. It's just the way the market is,” said Amber Atherton, partner at early-stage consumer fund Patron.
That's what's led to some of the most extreme seed valuations, including ex-OpenAI's Mira Murati's $2 billion seed for Thinking Machine Labs at a $12 billion valuation.
Leven, a second-time founder, said her startup's valuation at this stage is double its initial valuation at a similar stage. Not only is her latest company in AI, but it currently has much more traction than her previous startup, showing how quickly new companies like hers can grow.
“I have multiple six-figure contracts right now, and I'm currently working on a seven-figure contract. We need that to procure,” Leven said. “My friend is raising a similar round, not AI, and it took her two years to raise half of what I raised, while it took me three weeks.”
Pre-seed is a new seed
Seed VCs like Vermillions Smith are responding to rising seed valuations by increasing pre-seed deals. Pre-seed startups are very early, pre-revenue startups, like seed companies used to be many years ago.
Workbench general partner Jonathan Lehr, whose $160 million fund focuses primarily on seed rounds, said the firm has become “increasingly comfortable” with pre-seed entry as companies scale significantly faster.
It's more common for investors to put money into startups early, Lehr explained, because the increased exposure is just the price they pay for “access to companies that can scale more quickly and become category leaders.”
Meanwhile, Atherton said the average check size for her firm's $100 million Fund II is now in the $4 million to $5 million range, up from $1 million to $2 million for its $90 million Fund I, to capture some of these promising early-stage startups.
“AI has raised the bar much higher for founders to have a live product that can acquire users and generate revenue quickly,” she said. “Great founders deliver their products to users and generate revenue almost immediately, forcing investors to move faster and take on real-world traction faster.”
So seed VC is no longer “backing an idea,” she explained, but “backing early evidence of real consumer product demand.” Seed VCs are also accelerating the transition “from slow diligence to more confident decisions about allocation, retention, and founder preferences.”
But there's a catch
As the stakes rose, so did investor expectations.
Atherton said it is no longer enough for companies to simply manufacture and ship products. Now anyone can do it. It's not about traction, but it helps a lot. This is about the future and the stories founders can tell about how they can outperform others and beat everyone in the market. That's what these seed VCs believe will lead these startups to durable $50 billion+ companies, or at least some kind of profitable exit.
“People are just trying to survive the pressure,” Leven said. “If we don’t do that, we won’t have enough money to grow and really compete.”
The good thing about raising a lot of money in the early stages as a founder is that it helps your company move quickly and hire expensive talent. When pricing term sheets, venture capitalists know that talent in the AI era costs money, and so does running the AI models that power these startups and competing against well-capitalized competitors, sometimes large SaaS competitors already worth billions of dollars.
Leven says everyone is trying to recreate the magic of Google's acquisition of Wiz. But the risks are also higher. Founders must grow the company to a high early valuation before they need more cash. Series A investors also expect bigger, faster, and more.
Nichols and his company are now taking on more young companies than ever before, and have renewed hopes of reaching that milestone in about 18 months. “That discipline is just as important as supporting the winners,” he said.
Higher seed valuations mean less margin for error, Lehr added, “less room for experimentation, less tolerance for pivoting, and more scrutiny if progress isn't commensurate with the capital raised.”
Martin, a cybersecurity founder who successfully raised Series A funding late last year, said he has no problem seeing his company pass the benchmark. But he also had a warning for founders.
“You could end up caught in the middle,” Martin said. “Too expensive for new investors, but not enough traction to justify another round.”