VCs deploy ‘kingmaking’ strategy to crown AI winners in their infancy

In early October, DualEntry, a startup specializing in AI-driven enterprise resource planning (ERP), secured a remarkable $90 million in a Series A funding round led by prominent firms Lightspeed and Khosla Ventures. This investment has positioned the fledgling company, now just a year old, with a valuation of $415 million. DualEntry aims to disrupt traditional software solutions such as Oracle NetSuite by providing automation for routine tasks and delivering predictive insights. The substantial investment from top-tier venture capitalists indicates that DualEntry is likely on the path of impressive revenue growth. However, a venture capitalist who chose not to invest revealed to TechCrunch that the startup’s annual recurring revenue (ARR) was only around $400,000 during his review of the deal in August. DualEntry’s co-founder, however, disputed this figure, asserting that their revenue had significantly increased by the time the deal was finalized. This trend of exceptionally high valuations compared to revenue is becoming more prevalent among leading VC firms, a strategy referred to as "kingmaking." This approach involves heavily funding a single startup within a competitive sector to establish a significant financial advantage, thus creating a perception of market dominance. Although kingmaking is not a new concept, its application has evolved. Jeremy Kaufmann, a partner at Scale Venture Partners, noted that while venture capitalists have historically evaluated competitors and chosen a potential winner, the current environment sees this occurring much earlier in the startup lifecycle. Unlike previous investment cycles, where such strategies would manifest later, current trends show AIs gaining substantial funding at the early stages. David Peterson, a partner at Angular Ventures, likened this to the aggressive capital strategies employed by Uber and Lyft, which received substantial investment only after reaching their Series C or D rounds. Investors in DualEntry’s competitors, such as Rillet and Campfire, are equally eager to fuel their growth. Rillet recently completed a $70 million Series B round, just weeks after its $25 million Series A led by Sequoia, while Campfire AI secured a $65 million Series B shortly after its $35 million Series A led by Accel. The AI ERP segment is just one of many areas where startups are rapidly securing funding. Jaya Gupta, a partner at Foundation Capital, pointed out that it has become commonplace for Series B rounds to occur within a mere 27-60 days following Series A funding. She also noted that this trend is observable in sectors like IT service management and SOC compliance. Although some startups, like Cursor and Lovable, have shown remarkable growth between funding rounds, not all companies in the AI ERP space are achieving similar results, with some still reporting single-digit millions in ARR. Despite mixed opinions on the kingmaking approach, some venture capitalists argue that providing significant capital can be advantageous, even for startups with modest burn rates. Well-funded startups tend to be viewed as more stable by large enterprise buyers, thereby becoming preferred vendors for major software purchases. This strategy has proven effective for legal AI startup Harvey in attracting large law firm clients. However, history has shown that substantial funding does not guarantee success, as evidenced by high-profile failures such as logistics company Convoy and the reorganization of scooter company Bird. Nonetheless, leading VC firms remain undeterred, opting to invest heavily in promising AI categories early on. As David Peterson articulated, the lesson from previous years has been internalized: early investments in rapidly growing companies, as seen with Uber, often yield substantial rewards, making the risk of overpaying a distant concern.