How VCs Use ‘Kingmaking’ Strategies to Identify and Elevate Early AI Leaders
In the ever-evolving landscape of technology, DualEntry has emerged as a compelling player, recently announcing an impressive $90 million Series A funding round led by renowned investors Lightspeed and Khosla Ventures. This significant investment not only values the innovative computing startup at $415 million, but also highlights the growing interest in solutions that streamline and modernize business operations, particularly in the realm of enterprise resource planning (ERP).
Transforming Legacy Systems
With the aim of replacing traditional software giants like Oracle NetSuite, DualEntry offers a solution that automates routine tasks and delivers predictive insights. This ambitious vision, coupled with substantial backing from elite venture capitalists, signals promising growth prospects for the relatively young company.
However, some skepticism remains regarding DualEntry’s projected success. An unnamed VC reported that the company’s annual recurring revenue (ARR) stood at a modest $400,000 when he assessed the investment opportunity in August. Yet, co-founder Santiago Nestares vehemently disputes this claim, asserting the actual figures were “considerably higher” by the time they secured funding.
Investment Strategies: The Kingmaking Approach
The valuation raises questions about the trend of "kingmaking"—a strategy where venture capitalists funnel hefty investments into a select startup to establish market dominance. This tactic aims to empower chosen companies to eclipse their competitors by providing them an intimidating financial cushion.
- Kingmaking isn’t a novel concept, but its implementation has evolved significantly.
- Jeremy Kaufmann, a partner at Scale Venture Partners, articulates that early-stage investments in competitive sectors are more prevalent now than ever.
Previously, during the investment boom of the 2010s, this strategy was often termed “capital as a weapon.” Major players like Uber and Lyft exemplified this approach, but only after they had reached later funding stages.
Funding Frenzy in Competitive AI Markets
The fierce competition among startups is evident not only for DualEntry but also for its rivals Rillet and Campfire AI.
- Rillet recently secured a $70 million Series B, following a $25 million Series A, while Campfire AI executed two consecutive funding rounds—raising $65 million in Series B after a $35 million Series A.
This rapid funding cycle is not confined to AI ERP alone. Jaya Gupta, a partner at Foundation Capital, notes that Series B rounds often occur within 27 to 60 days** following Series A, reflecting a heightened investment pace across categories like IT service management and SOC compliance.
While companies like Cursor and Lovable may exhibit remarkable growth, others, including several AI ERP startups, still face challenges with single-digit million ARRs despite raking in substantial investment.
The Double-Edged Sword of Large Capitalization
While some investors question the efficacy of kingmaking as a sound strategy, others argue that significant funding can bolster a startup’s market presence. Well-capitalized firms often appear more stable to potential large-enterprise clients, as evidenced by the success of legal AI startup Harvey in attracting big law firm partnerships.
However, history serves as a reminder that hefty financial backing does not equate to guaranteed triumph. High-profile failures, such as the logistics company Convoy and the scooter startup Bird, illustrate the risks involved.
Major VC firms, undeterred by these setbacks, continue to focus on AI-driven solutions, seeking early investments in startups that operate within promising categories. As Peterson succinctly states, “Everybody has…internalized the lesson of the power law.” Early investors in companies like Uber, he argues, ultimately found themselves vindicated, irrespective of initial capitalization concerns.
In this bustling ecosystem of innovation and investment, the journey of startups like DualEntry will be one to watch, providing insights into the future of AI and the ever-important realm of business efficiency. As we navigate these transformative times, remember that the choices we make today can lead to the breakthroughs of tomorrow. Stay engaged and inspired, and keep an eye on the horizon for what’s coming next in the world of technology.
