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Hi, it’s Katie again! The frothiness of the artificial intelligence boom is starting to look like 1999…or 2021. Startups are again receiving unsolicited investment interest months or even weeks after announcing a fundraising, sometimes at prices that would more than double their valuation. The latest is Mercor, a startup that helps OpenAI and other AI developers find contractors to help train new models. Mercor has been receiving offers from investors at prices that would value it at as high as $10 billion, according to a person with knowledge of the offers. Just six months ago, the two-year-old startup announced it had raised $100 million at a valuation of $2 billion including the capital. Mercor is in the early stages of planning a round that could come together this fall, said another person, but it hasn’t decided all the terms yet, they said. By now, it’s likely that any buzzy AI startup—particularly one in a niche like coding assistance, where revenue growth has been off the charts—will receive offers well before the founders feel like they’re ready to raise again. Mercor CEO Brendan Foody, in fact, told my colleague Natasha last month that the startup has “had to ask investors not to send term sheets so it is not distracting us.” In March, it said its annualized revenue had hit $100 million. (Watch a TITV interview with Foody.) I don’t expect these pre-empted, or unsolicited, offers to stop anytime soon. But some founders are cooling the jets on fundraising, despite the heavy costs of paying to run their AI apps. Anysphere, the maker of code editor Cursor, has rebuffed offers that would have valued the company at $18 billion to $20 billion, according to people familiar with the matter. Those came just days after announcing a fundraise at a $10 billion valuation in June. Similarly, Cursor competitor Lovable received investment interest valuing it as high as $5 billion, according to a person familiar with the matter. (That’s even higher than the offers reported by the Financial Times.) But the company, which completed a funding at a $1.8 billion valuation in July, is “not fundraising,” said a spokesperson. Startups would be wise to take a measured pace to funding. Too much money dilutes existing investors and employees. And it can lead founders to spend lavishly on businesses that don’t make sense once the VC spigot closes. Just take a look at startup collapses such as WeWork and Wag bankrolled by SoftBank’s $100 billion Vision Fund in the years just before the pandemic. Short of failure, too much venture capital can make it harder for businesses to go public or be acquired, at least without taking a sharp valuation cut. “Venture valuations are driven by the promise of what could be. IPOs are driven by what is,” said Heidi Mayon, a partner at Simpson Thacher who advises startups on financings and exits. Notably, among the tech companies that went public in recent years, some like Chime, Instacart and Reddit priced their public shares sharply lower than what they were worth during the 2020-2021 startup funding boom. Many of the 2021 unicorns have been unable to raise another round, with investors skittish about overpaying for businesses that aren’t growing fast enough to become public companies. There are over 1,000 of these supposed billion-dollar companies. But it’s hard for founders and investors to pay attention to the lessons of the past when everyone else is winning deals by making pricy, pre-emptive offers. Take the recent group that participated in the Y Combinator accelerator program. In the current class of startups in the program, investors have made offers to invest at a valuation of $100 million or more in several of them ahead of next week’s Demo Day, according to a person familiar with the matter. In the past, investors considered valuations of $25 million to be high. One of these businesses is Design Arena, a startup developing a benchmark for AI-generated visuals, which turned down an $100 million-priced offer because the founders preferred to work with Index Ventures. The firm is instead leading an investment at a $70 million valuation, according to a person familiar with the matter. The startup decided that the highest offer is not necessarily the best offer, they added. Earlier Thursday, we reported that cloud upstart Lambda had won a $1.5 billion contract with Nvidia to lease high-end graphics processing units back to Nvidia. The deal closed earlier this year, and comes after we’ve reported about Lambda’s fundraising efforts and its hiring of IPO bankers. Lambda has already raised $250 million for its new round, and will target around $1 billion for its fundraise at between a $4 billion to $5 billion valuation, according to a person with knowledge of the matter. That’s double the funding target suggested by earlier reports. I’d assume that the flashy new customer deal has helped significantly with the company’s storytelling. Unknown: whether new customer Nvidia, which invested in Lambda earlier this year, will be in the current financing.— Natasha Mascarenhas
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