Pete Martin recalls securing a $5 million seed round at a $25 million post-money valuation for his AI-driven cybersecurity firm Realm back in 2024, which feels like a millennium in “AI years”.  

At that time, that valuation appeared elevated for that sum, he noted. However, presently, “it’s quite standard” to observe a $10 million seed round at a $40 million to $45 million post-money valuation, particularly for an AI enterprise, he mentioned.  

In fact, this tends to occur exclusively for AI firms, as investors are showing scant interest in any other sectors. 

During the latest Y Combinator Demo Day in March, conversations revolved around the inflated valuations of companies, stated Ashley Smith, a general partner at early-stage fund Vermilion. Numerous startups had clinched six- to seven-figure customer contracts, including one that had only been operational for eight weeks, she remarked, leading to companies requesting $5 million at a $40 million post-money valuation.

This situation surpassed the so-called “YC tax,” which illustrates how much extra investors are prepared to invest simply because the startup is a YC alumnus, she explained. Even with those early revenue figures, Smith asserted that market investors are valuing rounds “years ahead of actual traction.”

Major venture firms, buoyed with capital, are also entering rounds at earlier stages, escalating startup prices and valuations with the hope of attaining significant returns if these companies eventually go public or exit. Smaller VC firms also exhibit an unquenchable thirst for AI enterprises. As an investor concentrated on AI infrastructure, Smith noted that she frequently finds herself priced out of a round, especially when a larger firm steps in. This is one reason both founders and VCs claim seed deal volume has declined, even as valuations have soared, according to data from Carta.  

Shanea Leven, founder of the enterprise AI application platform Empromptu, points the finger at Cursor, which achieved $100 million in revenue within just 12 months in early 2025. It was one of the first prominent AI companies to raise the standard for how rapidly these startups could achieve traction, although it certainly wasn’t the sole example. Others include Lovable, Bolt, OpenEvidence, and ElevenLabs, all touting their rapid progress. Although these are exceptions, it’s challenging for some not to feel the generated excitement.  

“The expectations from investors are changing now,” she claimed. “The pressure is unprecedented, not just to become a billion-dollar entity, but a $50 billion one.”   

Accelerated traction, larger valuations 

VCs are quick to justify the rise in seed valuations. For example, Marlon Nichols, managing general partner at MaC Ventures, stated that the evidence lies in the traction evident right from the start, influencing seed pricing. When he founded his firm in 2019, he noted his average entry investment was $2.5 million. Currently, it’s $5 million.  

“The top seed-stage firms no longer resemble typical seed-stage companies,” he asserted. The evolution of AI tools enables founders to reach minimal viable products and acquire early customers more rapidly than ever, even among large enterprises that are eagerly scouting for AI deployment solutions.

Nichols’ last two seed investments were generating over $2 million in revenue, featuring “paid pilots from substantial enterprises” and “a clear pathway to full commercial agreements.” He issued checks ranging between $3 million and $4 million and agreed to value the startups at $25 million and $30 million post-money, respectively, significantly more compared to a few years ago.  

The founders’ past experiences also impacted his term-sheet offers. “They possessed relevant backgrounds” and “a history of execution,” he explained, “which mitigated much of that early-stage risk.”  

Moreover, investors are prepared to pay premium prices for proven AI talent, favoring second-time founders or those possessing credentials from recognized prior employers (such as OpenAI). This also raises anticipated valuations across the landscape.

“There’s an ongoing competition for outstanding researchers currently, and I don’t classify it as good or bad; it simply reflects the existing market conditions,” Amber Atherton, a partner at the early-stage consumer fund Patron, noted.  

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

Leven, who is a second-time founder, mentioned that her startup’s valuation at this stage is double that of her initial company at a comparable phase. Not only is her latest venture AI-focused, but it also has substantially more traction than her previous startup did at this point, illustrating how swiftly new businesses like hers can expand.  

“I presently hold several six-figure contracts and am about to close a seven-figure deal. You need these to secure funding,” Leven explained. “A friend of mine is attempting to raise a comparable amount, but hers is not in AI, and it took her two years to achieve half of what I secured in three weeks.”  

Pre-seed is the new seed 

Seed VCs like Vermilion’s Smith are countering increasing seed valuations by pursuing more pre-seed deals. Pre-seed startups resemble the kind of companies that seed firms used to be many years ago: extremely early and pre-revenue. 

Jonathan Lehr, a general partner at Work-Bench, is investing from a $160 million fund predominantly aimed at seed rounds, though he mentioned that the firm has become “more comfortable” participating at the pre-seed stage as companies scale much quicker.  

It’s becoming more typical to see investors inject capital into startups at earlier stages, as enhanced exposure is simply the cost of “accessing firms that can scale rapidly and emerge as category leaders,” Lehr commented. 

Meanwhile, Atherton noted that to secure a stake in these promising early-stage enterprises, the average check size for her firm’s $100 million Fund II now spans from $4 million to $5 million, up from $1 to $2 million for its $90 million Fund I.

“AI has significantly elevated the standards for founders to launch with live products and customers right away,” she stated.  “Investors must act more swiftly and assess real-world traction at an earlier stage since the best founders are delivering products with users and revenue almost immediately.”

Thus, seed VCs are no longer “backing ideas”; they are “backing early indications of genuine consumer product demand,” she articulated. Seed VCs are also accelerating their pace, shifting “from slow diligence to high-conviction judgments regarding distribution, retention, and founder characteristics.” 

But there’s a catch

As expectations have risen, so have investors’ demands.  

Atherton expressed that it’s no longer adequate for a company to merely develop and dispatch a product. Today, anyone can achieve that. It’s not solely about traction, although that is beneficial. It centers on the future, the narrative founders present about how they will outperform their competitors and dominate the market. This is what these seed VCs believe will propel startups towards sustained, $50 billion+ valuations or at least lead to some profitable exit.

“Individuals are merely striving to withstand the pressure,” Leven noted. “Otherwise, there won’t be sufficient funds to expand and genuinely compete.”  

The upside of raising significant amounts of capital at the nascent stages for a founder is that it enables the company to accelerate and recruit costly talent. VCs understand, as they formulate their term sheets, that talent during the AI era is expensive, as are the operations of the AI models supporting these startups, and contending with other well-funded adversaries, sometimes large SaaS companies already valued in the billions. 

Everyone, according to Leven, is attempting to replicate the success of Google’s acquisition of Wiz. However, the stakes are higher as well. Founders must evolve their businesses into entities that validate the elevated early valuations before seeking further funding. Series A investors are also anticipating larger, quicker, and more.  

Nichols and his firm are currently evaluating an increasing number of young companies, with new expectations that they meet their milestones within approximately 18 months. “That discipline is equally crucial as backing winners,” he stated.  

Elevated seed valuations lead to a narrower margin for mistakes, Lehr commented, adding: “Less latitude for experimentation, diminished tolerance for pivots, and heightened scrutiny if progress doesn’t align with the capital raised.”  

Martin, the cybersecurity entrepreneur, successfully completed his Series A funding late last year, mentioning that the benchmarks were manageable for his firm to meet. Yet, he too cautioned founders.

“You might find yourself trapped in the middle,” Martin warned. “Too costly for new investors, yet lacking the momentum to validate the next round.”