Venture capitalists are fighting to invest in AI startup Emulate, driving its valuation into the billions — even though the company is only three months old and doesn’t yet have a website or product.

Competition to back the startup, formed by alumni of Google DeepMind, is so intense that investors are willing to buy into the same fundraising round at rapidly escalating prices.

Two big-name investors, Index Ventures and Lightspeed Venture Partners, initially backed the company at around a $200 million valuation, according to people familiar with the matter.

Another investor, Creandum AB, has bought into the same funding round at about a $3 billion valuation, a 15-fold increase, the people said, asking not to be identified as the information isn’t public. Nothing materially changed about Emulate between these chunks of cash, they said.

Representatives for Index and Creandum declined to comment. Lightspeed and Emulate did not respond to a request for comment.

A conventional startup fundraising round involves venture capitalists buying shares at the same agreed price, giving the startup a single headline valuation at that point in time.

But pressure to back promising new AI startups is upending that process, with investors sometimes paying wildly different prices for the same company. That means a company can notch multiple valuations simultaneously or in rapid succession, and sometimes only the higher number is made public.

These types of deals have proliferated in Silicon Valley, the center of the AI boom, and are now spreading to Europe. That is alarming some founders and investors who say inflated valuations can leave startups with little room to grow into their price tags, particularly in a region with fewer blockbuster exits.

“As soon as you have a down round, or growth plateaus, the entire house of cards collapses,” said Ralf Gulde, chief executive officer of robotics startup Sereact. “The mechanism only works if the company is certain that it will grow to that valuation.”

“It’s very risky to the founders and employees,” he added. “You could go home with zero.”Still, such deals are gaining ground as investors seek out potential challengers to OpenAI, Anthropic PBC or chipmaker Nvidia Corp.

British chip firm Fractile split its latest financing effort, which hasn’t yet been announced, into multiple parts, according to people familiar with the matter.

The first part, backed by Thrive Capital and Founders Fund, valued the company at roughly $3 billion, people familiar with the matter said. Another portion involving Lightspeed and Redpoint Ventures valued the company at roughly $6.5 billion.

Thrive Capital declined to comment. Fractile, Lightspeed, Redpoint, and Founders Fund didn’t respond to requests for comment.

Startups don’t always signal that they are fundraising using these mechanisms, making them difficult to categorize. Investors sometimes refer to tranched deals interchangeably as two-step rounds, where a startup has raised at different valuations in the same process, or fast follows, where rounds are separated but take place in quick succession.

For example, some people described Fractile’s financing as tranched, while others disputed that it should be categorized that way.

The differences in how these terms are used aren’t always legally consistent, Crowell & Moring LLP partner Justin Lurie said. Strictly speaking, few AI deals are really tranched since that structure involves tying funding to performance, he added.

Some have singled out Sequoia Capital as one of the investors aggressively embracing these deals.

“In the last 6 mo’s ive seen a half dozen rounds where Sequoia invests in 2 tranches,” wrote Mercor founder Brendan Foody on X in June. “Everyone pretends they only did the higher valuation. Founders misrepresent this to their employees & then shop it to angels too.”

In a follow-up post, Foody clarified that this is “common practice in the industry across all top firms.”In April, Sequoia-backed Ineffable Intelligence, a British AI startup founded by star Google DeepMind researcher David Silver, raised seed financing at a blockbuster headline valuation of $5.1 billion. That round turned Ineffable into one of the most highly valued AI startups in Europe, though it was a weeks-old company.

The reality was more nuanced. Sequoia, Ineffable’s earliest backer, first invested in the company at a fraction of the price, according to a person familiar with the matter. Public filings imply an early valuation of $55 million before accounting for the employee options pool. Sequoia later put a larger check into a second, bigger tranche for the startup, the person said. Sequoia Capital declined to comment.

In an online presentation, Sequoia partner Pat Grady described seven “two-step” deals in the last year where the venture firm put money into a startup at an average valuation of $110 million. One month on, investors were coming in at an average $3.4 billion valuation.

“Some of the smaller VC investors simply aren’t able to access the most exciting deals,” said Alex Ferrara, partner at Bessemer Venture Partners. “Investing in the higher priced tranche is the price they have to pay for that access.”There is nothing legally wrong with startups announcing the higher valuation after a fundraise, even if it raised simultaneously at a lower price, according to Crowell & Moring’s Lurie. The concern, however, is whether employees and the backers paying more have full visibility into what’s happening.

“I don’t think it’s a problem so long as the CEO is transparent,” said Bessemer’s Ferrara. “It’s when there’s a lack of transparency that it becomes a problem.”Investors, whether they get into a round in the first or later tranche, will need to apply the usual logic of venture capital — investing in a startup at a high valuation requires a much bigger exit.

“When you invest at $5 billion seed or pre-seed, what you’re really saying is that the company will be worth at least $100 billion,” said Paul Bonnet, general partner at 20VC.