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Tag: Valuations

  • It’s not only Sam Altman anymore warning about an AI bubble. Mark Zuckerberg says a ‘collapse’ is ‘definitely a possibility’ | Fortune

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    Deutsche Bank called it “the summer AI turned ugly.” For weeks, with every new bit of evidence that corporations were failing at AI adoption, fears of an AI bubble have intensified, fueled by the realization of just how topheavy the S&P 500 has grown, along with warnings from top industry leaders. An August study from MIT found that 95% of AI pilot programs fail to deliver a return on investment, despite over $40 billion being poured into the space. Just prior to MIT’s report, OpenAI CEO Sam Altman rang AI bubble alarm bells, expressing concern over the overvaluation of some AI startups and the intensity of investor enthusiasm. These trends have even caught the attention of Fed Chair Jerome Powell, who noted that the U.S. was witnessing “unusually large amounts of economic activity” in building out AI capabilities. 

    Mark Zuckerberg has some similar thoughts. 

    The Meta CEO acknowledged that the rapid development of and surging investments in AI stands to form a bubble, potentially outpacing practical productivity and returns and risking a market crash. But Zuckerberg insists that the risk of over-investment is preferable to the alternative: being late to what he sees as an era-defining technological transformation.

    “There are compelling arguments for why AI could be an outlier,” Zuckerberg hedged in an appearance on the Access podcast. “And if the models keep on growing in capability year-over-year and demand keeps growing, then maybe there is no collapse.”

    Then Zuckerberg joined the Altman camp, saying that all capital expenditure bubbles like the buildout of AI infrastructure, seen largely in the form of data centers, tend to end in similar ways. “But I do think there’s definitely a possibility, at least empirically, based on past large infrastructure buildouts and how they led to bubbles, that something like that would happen here,” Zuckerberg said.

    Bubble echoes

    Zuckerberg pointed to past bubbles, namely railroads and the dot-com bubble, as key examples of infrastructure buildouts leading to a stock-market collapse. In these instances, he claimed that bubbles occurred due to businesses taking on too much debt, macroeconomic factors, or product demand waning, leading to companies going under and leaving behind valuable assets. 

    The Meta CEO’s comments echoed Altman’s, who has similarly cautioned that the AI boom is showing many signs of a bubble. 

    “When bubbles happen, smart people get overexcited about a kernel of truth,” Altman told The Verge, adding that AI is that kernel: transformative and real, but often surrounded by irrational exuberance. Altman has also warned that “the frenzy of cash chasing anything labeled ‘AI’” can lead to inflated valuations and risk for many. 

    The consequences of these bubbles are costly. During the dot-com bubble, investors poured money into tech startups with unrealistic expectations, driven by hype and a frenzy for new internet-based companies. When the results fell short, the stocks involved in the dot-com bubble lost more than $5 trillion in total market cap.

    An AI bubble stands to have similarly significant economic impacts. In 2025 alone, the largest U.S. tech companies, including Meta, have spent more than $155 billion on AI development. And, according to Statista, the current AI market value is approximately $244.2 billion.

    But, for Zuckerberg, losing out on AI’s potential is a far greater risk than losing money in an AI bubble. The company recently committed at least $600 billion to U.S. data centers and infrastructure through 2028 to support its AI ambitions. According to Meta’s chief financial officer, this money will go towards all of the tech giant’s US data center buildouts and domestic business operations, including new hires. Meta also launched its superintelligence lab, recruiting talent aggressively with multi-million-dollar job offers, to develop AI that outperforms human intelligence.

    “If we end up misspending a couple hundred billion dollars,  that’s going to be very unfortunate obviously. But I would say the risk is higher on the other side,” Zuckerberg said. “If you build too slowly, and superintelligence is possible in three years but you built it out were assuming it would be there in five years, then you’re out of position on what I think is going to be the most important technology that enables the most new products and innovation and value creation in history.”

    While he sees the consequences of not being aggressive enough in AI investing outweighing overinvesting, Zuckerberg acknowledged that Meta’s survival isn’t dependent upon AI’s success.

    For companies like OpenAI and Anthropic, he said “there’s obviously this open question of to what extent are they going to keep on raising money, and that’s dependent both to some degree on their performance and how AI does, but also all of these macroeconomic factors that are out of their control.”

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    Lily Mae Lazarus

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  • Paris-Based Mistral AI Seeks $14B Valuation as Europe Charts Its Own A.I. Path

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    CEO Arthur Mensch is steering Mistral away from the AGI hype and toward Europe’s A.I. sovereignty. Photo by Ludovic Marin/AFP via Getty Images

    Paris-based Mistral AI is on track for a new funding round that would value the A.I. startup at 12 billion euros ($14 billion), Bloomberg reports. The investment, expected to total around 2 billion euros ($2.3 billion), would solidify the company’s position at the center of Europe’s sovereign A.I. strategy and bring it closer to its goal of challenging dominant U.S. rivals.

    Founded in 2023, Mistral has already raised some 1.1 billion euros ($1.3 billion) over the past two years. Its upcoming valuation would more than double the 5.8 billion euros ($6.8 billion) figure it reached last June following a 468 million euro ($550 million) round that drew backers such as Andreessen Horowitz, Salesforce and Nvidia.

    Mistral did not respond to requests for comment from Observer.

    For now, the startup still pales in size compared to its Silicon Valley competitors. Anthropic closed a round earlier this month at a staggering $183 billion valuation, while OpenAI is reportedly eyeing $500 billion. Still, Mistral is eager to compete. Its products include an A.I. assistant called “Le Chat,” designed for European customers and positioned as an alternative to OpenAI’s ChatGPT and Anthropic’s Claude chatbots.

    Mistral was co-founded by Arthur Mensch, a former researcher at Google DeepMind, along with former Meta researchers Timothée Lacroix and Guillaume Lample. Mistral has tried to distinguish itself by emphasizing open access. It has released several open-source language models. Unlike American A.I. giants, Mistral has also rejected pursuing AGI. Mensch, who serves as CEO, has said his firm is more focused on ensuring U.S. startups don’t dominate how the technology shapes global culture.

    Mistral is central to Europe’s A.I. playbook

    Mistral is part of a broader surge in European A.I. investment. In 2024, venture capital rounds involving A.I. and machine learning companies based in Europe were estimated to have reached 13.2 billion euros ($15.5 billion), up 20 percent from 2023, according to data from Pitchbook.

    Mistral is part of a broader surge in European A.I. investment. In 2024, venture capital rounds involving A.I. and machine learning companies across the continent were expected to reach 13.2 billion euros ($15.5 billion), a 20 percent increase from the year before, according to PitchBook.

    As one of Europe’s leading startups, Mistral is central to the region’s goal of building an A.I. ecosystem independent of technology from America or China. Earlier this year, the company partnered with Nvidia to launch a European A.I. platform that will allow companies to develop applications and strengthen domestic infrastructure. French President Emmanuel Macron hailed the initiative as “a game changer, because it will increase our sovereignty and it will allow us to do much more.”

    Mistral’s rapid ascent is tied to broader efforts to bolster A.I. across Europe and France. Its Nvidia partnership followed Macron’s announcement at Paris’ global A.I. summit in February, where he pledged more than 100 billion euros ($117 billion) to support France’s A.I. industry. European players must move quickly, Macron stressed at the time: “We are committed to going faster and faster.”

    Paris-Based Mistral AI Seeks $14B Valuation as Europe Charts Its Own A.I. Path

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    Alexandra Tremayne-Pengelly

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  • How to Navigate the Choppy Waters of Startup Valuation | Entrepreneur

    How to Navigate the Choppy Waters of Startup Valuation | Entrepreneur

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    Opinions expressed by Entrepreneur contributors are their own.

    Entrepreneurs often have a deep, personal investment in their businesses, having dedicated years of hard work to bring their ideas to life. However, this emotional attachment can cloud their judgment and make it difficult to objectively assess their venture’s worth. They might find themselves attempting to translate personal effort, time and sacrifice into financial value, which can be problematic in the current environment.

    Though Series A investment activities have been stable as of late, there’s been an uptick in down rounds. According to PitchBook and J.P. Morgan, down rounds grew from 8% in 2022 to 20% in 2023. That means less money is coming in than normal, which means more venture-backed startups are on the hunt for capital.

    Complicating matters further is the valuation process itself. Many new businesses mistakenly set their value based on competitors, using similarity of goods or services to estimate worth. This type of comparison overlooks differentiators, such as operational, financial or execution risks. Failing to consider milestones that you’ve yet to achieve can lead to the misconception that all is equal.

    It’s important to remember that a competitor’s current valuation is the result of their unique journey, and yours will be something entirely different. The challenge is separating personal bias from objective assessment, as you’ll need a clear-eyed view of what your business offers to arrive at an accurate and realistic valuation.

    Related: What Every Founder Needs to Know About the Valuation Gap Between Entrepreneurs and Investors

    Preparing for a funding round

    Merely launching a great business doesn’t automatically mean it’s ripe for investment. The fundamental economic principle behind raising capital is that the injection of outside funds should fuel growth and increase the value of the business, creating the potential for investors to see a return on investment. It’s not like investors invest out of the kindness of their hearts (at least, most don’t). They want to see a clear pathway to profitability. The question then remains: How exactly do you prepare for those inevitable funding rounds? Here are some suggestions to get you started:

    1. Demonstrate the “why”

    Rarely, if ever, will it be enough to simply offer a piece of the business to potential investors. When angling for funding, it’s important to articulate the precise benefits of backing your venture. This is especially important in light of the 30% drop in startup funding in 2023, according to Reuters. You should be able to answer at least these questions: Why should anyone invest in your business? What’s the economic rationale for the investment? How will an investor make money?

    Whether it’s an ambitious tech innovation or a noble cause, go beyond the vision or mission of your company and present a plan that clearly shows how you intend to use the capital to achieve specific milestones. That means focusing on practical financial outcomes, which increases the chances that potential investors see a pathway to profitability. They also get a better understanding of the mechanisms in place for monitoring progress and achieving an exit. This clarity in the potential for financial return is what can make the difference in securing much-needed funding versus never getting a meeting.

    2. Understand the story behind the numbers

    In the context of venture capital and private equity, a compelling pitch will only get you so far. Rather, securing funding is more about what the concrete numbers reveal about the profitability of your venture. Profit margin, for one, offers insights into your company’s financial health and potential for growth. The same can be said for customer lifetime value, cost structure and revenue.

    For example, when my firm evaluates a business, understanding the cost of capital in the current market is crucial — even more so if we encounter a startup with an unclear equity distribution or no significant personal financial contribution. The issue arises when such a company claims that it’s worth a substantial amount, say $1 billion, without a defensible rationale. In other words, always provide tangible evidence that the hard work put into building the business translates into something of real value.

    Related: How to Get Funding: The Dos and Don’ts of Raising Capital From Investors

    3. Be mindful of investment terms

    One aspect that entrepreneurs often overlook is the concept of “toxic minority control,” which refers to the disproportionate influence or power held by minority shareholders. Should some disruptive investor buy up enough shares to secure a place on the board, it could potentially lead to adverse outcomes for the venture and other investors. You need to be mindful of this when raising capital, as the terms of investment can have far-reaching implications beyond the immediate influx of funds.

    Take Alphabet Inc., for example. Even though Larry Page and Sergey Brin own just 5.7% and 5.5% of the company, respectively, the two Google co-founders each own Class B shares, or “super-voting” shares, providing them with 10 times the control — or 51% of the votes, collectively. Meta and Walmart are other examples of companies with founders (or the heirs of founders) who still control the business even after the initial public offering.

    4. Never underestimate (or overestimate) market trends

    Though this should go without saying, where the market is headed can significantly influence your startup’s valuation. You need only look to last year for an example of that, with generative AI and AI-related startups raising nearly $50 billion in venture capital, per reporting from Crunchbase. However, don’t make the mistake of benchmarking yourself against corporations listed on the stock exchange.

    While market trends certainly make one startup more attractive than another, being in the same industry doesn’t equate to having the same value. Consider the nuances of your company’s stage, market position and operational history in relation to those operating in the same space. PitchBook and Y Combinator are both great resources, as they regularly publish statistics on the average valuations of amounts raised for different funding rounds. Understand where your company truly stands in terms of where the market is headed, as well as your market reach and status, to arrive at a realistic valuation of your venture.

    Related: 6 Parameters That Determine Company Valuation

    Entrepreneurs often begin with an idea and believe that its mere conception is equivalent to its potential realized. They look at the end goal, which can lead to unrealistic valuations. What truly matters, at least in the eyes of investors, is the ability to execute on that idea, which comes down to the numbers. Get clear on your standing, and then let that guide your discussions with potential investors.

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    Jordan Gillissie

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  • 3 Things Founders Need to Know About Liquidity | Entrepreneur

    3 Things Founders Need to Know About Liquidity | Entrepreneur

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    Opinions expressed by Entrepreneur contributors are their own.

    Is it easier or harder to build a successful startup now than in the past? In many ways, it’s so much easier to launch a startup today than in the past; the ecosystem is full of services, access to information is instant, the startup world is now a global industry where so much has been templatized and millions of “how-tos” are available, and a proliferation of venture capital, incubators and accelerators are more available than ever.

    There are newer challenges that founders face today, however. Competition is global, the pace of innovation is constant and ever-accelerating, expectations are higher, and the road to IPO is longer. This last point could be the most interesting one; staying private longer changes the whole entrepreneurial journey and calculation. The clear path to liquidity via IPO or acquisition has changed, and leaders need to adjust.

    Related: 4 Ways an Entrepreneur Can Increase Liquidity

    How did we get here?

    Today, there are around 1200 unicorn companies globally. There have never been this many unicorns or privately owned companies valued over $1 billion USD before. The two biggest reasons a founder takes their company public is to have access to capital and to provide liquidity for shareholders. However, today, the abundance of available venture capital has made it possible for founders to keep increasing valuations and postponing a liquidity event. Plus, there are now other ways shareholders can reach liquidity without necessarily going through an IPO or an acquisition.

    Staying private delays the costly management and regulatory headaches of being publicly traded. Given all of the scrutiny and costly overhead of compliance and reporting required to run a public company, as a founder, you would probably prefer to grow outside of the public market. How does staying private longer affect founders, investors, employees and their company? And how does this change the way you operate?

    A founder’s guide

    Ten years ago, today’s unicorns would have gone public by now. Founders, VCs and employees would have converted their early investments and hard work into material wealth, however, that’s not happening in this market like it was in the past. Today, there are more options for liquidity for all equity stakeholders in companies without necessarily going through an IPO or acquisition. With more options for liquidity and a new entrepreneurial journey, founders should consider the following as they grow their companies.

    To start, if this is your first time starting your own company, get a board member or advisor who is knowledgeable about different stock incentive plans, how to structure them, tax implications, etc. Find members with a broad perspective coupled with deep expertise in your market, and seek out people who are experienced investors.

    Related: How Can Mentors Give Feedback to Founders without Discouraging Them

    The second thing to understand is that balancing employee compensation is a key tool in your growth plan. How much will employees receive in salary vs. what will they receive as equity compensation? For most startups, the biggest expense is salaries. We all want top talent, but sometimes we can’t afford it; this is where equity comes in. Equity gives employees skin in the game. They are part owners, and if the company succeeds, they’ll directly benefit from it. You get better performance out of employees when they feel ownership as well. However, it’s important to adjust the compensation plan as the company grows. These are a few things to consider:

    • Stage of the company: This directly relates to the risk the employee is assuming for taking this job. For both investors and employees willing to take the greater risk, they deserve the higher reward.

    • Job function and level: Higher-level employees might expect higher salary compensation while lower-level employees might be more willing to accept lower industry pay in exchange for greater equity compensation. It’s mostly about the stage in life they are in; as younger employees often have fewer responsibilities, they are more willing to take a lower salary. People with families usually can’t give up as much in salary compensation.

    • Market trends: What are your competitors doing? If you are offering something less interesting than your competitors, they might secure the best talent out there.

    • Keeping top talent incentivized: As the company grows and takes in new funding rounds, but you want to guard your run rate and optimize your cash, issuing new stock options is a great way to retain top talent.

    Keeping team morale high is key in down markets

    The robust growth we’ve seen in the private markets in the last ten years directly affected how and why the private capital secondary market grew. Since 2012, the secondary market has grown to more than five times its previous size, reaching a record $130B in 2021. During this time, online platforms that allow shareholders to buy and sell shares in private companies have surfaced and shown great success.

    We’ve been facing downturns and market instability and witnessing downward pressure on valuations in this market. Leaders steering a winning company must keep a perspective on the longer term, knowing that valuations are cyclical. It’s important to stick to fundamentals and assure shareholders that you see the path through the market’s vicissitudes.

    Related: 3 Simple Strategies to Boost Morale and Get the Best Results From Your Team

    Importantly, leaders need to tend to the people who built the company with them — which takes us to the third piece of advice. When employees have dedicated years to the cause, holding dreams of material wealth, delayed liquidity events threaten the very morale leaders need to keep the company strong. As a founder or leader, you should seriously consider the option for employees to sell shares in the secondary market without adding too much overhead to the cap table.

    Having employees work for extended periods of time with only paper wealth, while industries, competition and technology innovation never slow, can be risky. Giving employees the chance to convert their paper wealth into some tangible wealth could be the morale boost that saves the day.

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    Karim Nurani

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  • What SaaS Companies Need to Focus on to Survive Market Downturns

    What SaaS Companies Need to Focus on to Survive Market Downturns

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    Opinions expressed by Entrepreneur contributors are their own.

    If this is your first market downturn, you may be especially confused by the conflicting advice arising from such an event. To some, the sky is falling, and you should quickly change your model. To others, the pastures are green, and you should take advantage of the weakened landscape. Which one you are depends on what the data tells you about your business.

    Right now, the data from the venture capital world can feel bleak: Global VC funding fell 33% quarter-over-quarter in Q3 2022. SaaS, specifically, has seen valuations slide since the beginning of 2022. However, not all companies are created equal.

    The valuation decline has been the steepest for companies not focused on their data, specifically their unit economics. In those unit economics, you’ll discover whether you should bear down to weather the storm or attack the market to expand your dominance. Either way, the decisions you make now should be strongly rooted in your unit economics.

    Related: 2022’s Top Trends Impacting SaaS Company Funding and Growth

    The pendulum swing

    We all benefited from larger funds and higher valuations. A rising tide raises all ships; unfortunately, that includes the leaky ones. The glut of available capital meant companies performing at mediocre and poor levels from an efficiency perspective could still grow quickly. In some cases, investors were pushing companies to take more chances and bet on future growth, sacrificing efficiency and certainly profitability.

    Those days of “growth at all costs” seem behind us. As markets sank and capital tightened, funders scrutinized their deals harder. They now seek companies demonstrating the fundamentals of running a scalable SaaS company, with efficiency and a strong path to profitability as hallmarks.

    The metrics that matter

    To be clear, SaaS companies cannot survive without growth — dominating your space requires it. But growth can no longer come at all costs, and companies must display certain fundamental metrics to support faster growth. SaaS companies should track dozens of metrics, but to attract investment in the current market, companies must address their efficiency metrics, especially:

    • Gross retention, with a goal of 90%+;

    • Net retention, with a goal of 110%+;

    • Gross margins, with a goal of 75%+;

    • Cost of acquisition (CAC), with a payback goal of <2 years

    Achieving these efficiency metrics will help companies maintain or exceed their valuations. If you’re already achieving these metrics, then you’ve earned the right to discuss deploying more capital in exchange for growth. If you aren’t, consider slowing growth and redirecting your strategy, especially if capital is tight.

    Related: Four Ways To Ensure Your Company Will Survive A Market Downturn

    The cost of capital without efficiency

    The higher cost of capital may prove incredibly expensive for companies buying time to achieve efficient growth. Beyond tightened funding requirements and depressed valuations, investors are placing more funder-friendly structures into deals with less fundamentally sound companies, including liquidation preferences, voting rights and even board control to reduce their downside risk. In fact, overly flawed later-stage companies may struggle to find funding on acceptable terms and may have to explore an exit or consolidation. But those wanting to tough it out and buy time to see better metrics have options.

    What can leaders do now?

    Start by scrutinizing your business fundamentals and assessing the efficiency of your core operating teams, then adjust to reduce inefficient spending.

    • Sales: Review metrics like pipeline-to-bookings ratio (with a goal of 4-5x+) and average seller’s quota attainment (with a goal of 65%+). This information will focus your efforts and help you find needle-moving improvements before simply growing your sales teams without correcting underlying issues.

    • Marketing: Focus on efficiency metrics like your cost per opportunity across every channel and over-invest in high-performing channels.

    • Product teams: Consider tracking efficiency based on a product productivity benchmark and monitor user-to-issues ratios. You might invest more in customer features and platform stability over new builds to increase retention and enable higher converting upsells.

    • Customer success: Examine retention rates across various customer segmentations to understand your customer base’s strengths and weaknesses. Optimize your book of business-to-customer rep ratios, and heed customer Net Promoter Scores and other sentiment metrics.

    As you adjust, you may need to shrink your teams and rightsize your operation. It’s an unpleasant reality, but you should fill any cracks in your ship before renewing your push for growth. This can help control your burn rate and buy the time needed to convince an investor you’re on the path to efficiency.

    Related: 4 Tips To Keep Your Business Afloat in a Downturn

    Where is the funding?

    Valuations likely won’t reach 2021 numbers, but companies with strong fundamentals will find funding. Companies correcting their fundamentals and needing to buy time with capital will find tougher markets. So, where else can you go?

    Start with your current investor base. They have as much to lose as you do, and in the case of venture capitalists, they often have allocated “dry powder” for situations like these. They may also behave more moderately as bad valuations and more structure can often hurt their previous positions. Another way to avoid a down round in the short term is by raising via convertible notes.

    If equity is not an option, climbing interest rates have made debt providers more active, creating an opportunity to explore debt financing. If it’s available to you and makes sense financially, leveraging debt lets you raise non-dilutive capital that buys you time to achieve better efficiency metrics. Timing matters, however, as the debt market can ebb fast should monetary policies change further.

    The funding silver lining

    Companies that rightsize their operations and control their burn for the next year might find a funding pool at the end of the proverbial rainbow. Funds with charters to invest in private tech companies are riding out the troubled market on the sidelines. As the market improves, funds will further open their checkbooks to companies with healthy efficiency metrics.

    Valuations may not have completely rebounded by then, but companies will keep raising at good multiples if they demonstrate solid fundamentals and maintain healthy efficiency metrics alongside growth rates. These companies are best prepared to ride out the falling wave and catch the rising tide again.

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    Afif Khoury

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