The venture capital landscape is witnessing a new trend: massive, early-stage investments in startups, even with relatively modest revenue. This strategy, dubbed “kingmaking,” was recently highlighted by a $90 million Series A round for DualEntry, an AI ERP startup, valuing the company at $415 million. The influx of capital aims to establish a dominant market position by overwhelming competitors with financial firepower.
DualEntry, founded just last year, intends to disrupt the enterprise resource planning market currently dominated by established players like Oracle NetSuite. The company’s platform focuses on automating routine tasks and delivering predictive insights. However, questions surrounding the startup’s current revenue raise concerns about the justification for its high valuation.
The Rise of “Kingmaking” in AI Investment
While venture capitalists have always sought to identify and back potential market leaders, the timing of these large investments is shifting dramatically. According to Jeremy Kaufmann, a partner at Scale Venture Partners, firms are making substantial bets much earlier in a company’s lifecycle. This contrasts sharply with previous investment cycles, where significant funding rounds typically occurred later in a startup’s growth trajectory.
This approach, reminiscent of the “capital as a weapon” strategy employed in the 2010s with companies like Uber and Lyft, is now being deployed at the Series A stage. David Peterson, partner at Angular Ventures, notes that Uber and Lyft didn’t receive comparable funding until their Series C or D rounds. The current trend represents a significant acceleration of this tactic.
Rapid Funding Rounds in Competitive Spaces
The AI ERP space is a prime example of this phenomenon. Competitors Rillet and Campfire AI have also secured substantial funding in quick succession. Rillet raised $70 million in a Series B just two months after a $25 million Series A, while Campfire AI followed a $35 million Series A with a $65 million Series B in a similar timeframe. This pattern extends beyond ERP, with Jaya Gupta, a partner at Foundation Capital, observing similar rapid funding cycles in areas like IT service management and SOC compliance.
However, reports suggest that revenue growth isn’t always keeping pace with the funding. Several venture capitalists have indicated that many of these startups, including some in the AI ERP category, still have annual recurring revenue (ARR) in the single-digit millions despite raising significant capital. DualEntry’s reported ARR of around $400,000, a figure disputed by the company’s co-founder, Santiago Nestares, exemplifies this discrepancy.
Why Invest Big, Early?
Despite the potential risks, investors believe that substantial funding can provide a competitive advantage. Well-funded startups are often perceived as more stable and reliable by large enterprise buyers, making them the preferred choice for significant software purchases. This strategy was reportedly successful for legal AI startup Harvey, which attracted major law firm clients due to its strong financial backing.
Additionally, the power law of venture capital – the idea that a small number of investments generate the majority of returns – is driving this behavior. Investors, remembering the potential gains from early investments in companies like Uber, are willing to take risks and invest heavily in promising startups, even if valuations appear high. The fear of missing out on the next big success story is a powerful motivator.
However, history is littered with examples of heavily funded startups that ultimately failed, such as logistics company Convoy and scooter company Bird. These precedents haven’t deterred major VC firms, who remain focused on identifying and backing companies in categories they believe are ripe for disruption by artificial intelligence.
The trend of aggressive early-stage funding is also impacting the broader software market, as investors seek to establish dominance in key application areas. This is leading to increased competition and a faster pace of innovation, but also raises questions about the sustainability of these high valuations.
Looking ahead, the next 12-18 months will be crucial for evaluating the success of this “kingmaking” strategy. Investors will be closely monitoring the revenue growth and market share gains of these heavily funded startups. The ability to translate substantial capital into tangible results will determine whether this approach represents a sound investment strategy or a risky gamble. The performance of DualEntry, Rillet, and Campfire AI will be particularly closely watched as bellwethers for the future of AI-driven enterprise software.
