Currently, a notable trend is sweeping through Silicon Valley and the broader global AI venture capital landscape, characterized by the intentional inflation of valuations through strategies like dual-tranche financing. Take, for example, Instinct, an AI firm founded by a 23-year-old entrepreneur. Its valuation skyrocketed from $2.5 billion to $10 billion in a mere month. This phenomenon isn't isolated; a slew of AI startups, boasting high valuations, brief operational histories, and nascent products, are continually popping up. Statistics reveal that in the last 12 months alone, the cumulative valuations of ten unprofitable AI startups globally have ballooned by nearly $1 trillion.
In this bubble-inflating process, early-stage venture capital firms, founders, and financial advisors reap profits through management fees, the sale of existing shares, and commissions. Meanwhile, limited partners, later-stage investors, and ordinary employees are left to bear the brunt. When the bubble inevitably bursts, companies that seem to have high valuations and revenues may be the first to encounter difficulties. The risks then ripple out to the public market, ultimately leaving a trail of economic wreckage in their wake.