It was a frenzied year in venture capital, with the hottest AI companies raising hundreds of millions in fresh capital every few months and founders with the slightest kernel of an idea able to command multibillion-dollar valuations.
But some VCs think the good times won’t last.
“2026 will be a year of reckoning,” said Deedy Das, a partner at Menlo Ventures focused on AI and machine learning. “When you see almost 20 companies I can think of that have a billion-dollar post-money valuation that make no revenue, I don’t think it takes a genius to know that not all of them can work.”
Silicon Valley has been consumed by talk of a bubble for the last few months, with even OpenAI CEO Sam Altman saying we are in one, drawing comparisons to the dot-com boom of the late 1990s. Public markets have also been rattled by concerns that the trillions of dollars spent on AI data centers is increasingly risky, with stocks like Coreweave and Nvidia experiencing sharp declines.
VCs have been writing big checks into AI startups at the same time as it becomes harder for them to replenish their coffers. Firms are on track for their worst year of fundraising since 2017, according to Venture Capital Journal.
“Usually when those things happen together, there is some correction in the market,” Das said, adding he became especially concerned after seeing many of his friends raising at elevated valuations without ever formally starting their companies. “That seemed to be such a regular phenomenon to me that it really begged the question that if you’re going to raise $50 million before even incorporating the company, what does that mean for the state of the industry?”‘
A startup’s first round of funding, commonly referred to as the seed round, is typically around $2.5 million, a figure that has been blown out of the water by recent financings for startups led by in-demand AI talent.
There were nearly 700 seed-stage rounds of $10 million or more in 2025, which is an all-time high according to Crunchbase data.
Over the summer, former OpenAI Chief Technology Officer Mira Murati raised $2 billion at a $10 billion valuation, with scant details about what she would build. Even with little traction or growth, she is now in talks to raise at a $50 billion valuation.
Eric Zelikman, a top AI researcher who departed xAI in September, is raising $1 billion at a $4 billion valuation for his new startup, Business Insider previously reported. This month, Naveen Rao, former head of AI at Databricks, announced $475 million in seed funding at a $4.5 billion valuation for his new startup, Unconventional AI.
“There’s definitely an element that the bigger VCs have FOMO of missing the next OpenAI,” said Steve Brotman, managing partner and founder of Alpha Partners. “If you’re one of these bigger funds, you’re paid to be in the next OpenAI, and if there’s any chance a company is the next OpenAI, it could be worth paying billions.”
Brotman, by the way, like nearly every other VC, says he regrets not investing in OpenAI or Anthropic. “You learn from your lessons, and you go forward,” he said.
A ‘bloodbath’ of startups
Joanne Chen, general partner at Foundation Capital, recently returned from a conference where she was taken aback by the number of founders too young to legally drink who were raising “crazy rounds with zero work experience because they came out of an AI lab.”
“It’s not like these founders have magically learned how to build businesses,” she said. “I suspect we’ll see a bloodbath over the coming years as some of these companies don’t succeed.”
During the post-2021 slowdown, VCs had the leverage to dictate tougher terms for startups. This year, it’s the top founders who have all the leverage with VCs scrambling to impress them, according to Cathy Gao, a partner at Sapphire Ventures.
“For your first conversation with a company, you have to not only know what they do, but be ready to pitch and sell yourself and your firm, because you may only have that one shot to leave a lasting impression,” Gao said. “If you don’t do well that first time, you may be out of the running. And it’s also caused investors to try to get really creative.”
It has also caused investors to perform less due diligence, so they don’t miss out on a deal, says Gao.
“Investors are getting less information and less face time with the team, and you have to make a decision, take it or leave it,” Gao said. “It creates a little bit of a dangerous situation.”
Still bullish on AI
Every VC Business Insider spoke to for this story stressed that while they are concerned by overexurbance, this has also been the most exciting time to be in venture in a long time because of the tremendous potential of AI.
“Unlike the boom in 2000, there are real numbers, real revenue, real profitability, and real economic value being driven to the consumer,” said Brotman. “I’m very bullish on 2026.”
“The companies that I’m seeing are breaking all sorts of records in terms of growth and efficiency,” added Gao. “And on top of that, I think we are underestimating the potential total addressable market for a lot of these AI companies.”
Venture capital is driven by the Power Law, which states that a very small number of startups will produce significant returns. So, VCs say it is fine that there is froth so long as you’re choosing the right froth. And naturally, every VC thinks their companies will be the winners.
“Part of the reason we all have FOMO is most VCs believe there’s going to be some truly exceptional companies that come out of this cohort,” said Gao. ” It’s just our job to get to conviction as quickly as possible and do everything we can to convince the founder to take our money.”
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