In November 2025, David Silver, the renowned former scientist at Google DeepMind, dialed into a Zoom meeting with a venture capital firm to pitch his new startup Ineffable Intelligence. Silver, who spent over a decade at Google, believed the current approach to training AI models wouldn’t work long term. He spoke for 30 minutes about creating digital environments where AI systems could learn on their own, without any human data or input.

Eventually, he told the investors on the call, AI will get so good that it will learn to use things in the physical world. “We can put AI in our toasters,” an investor recalls him saying.

That seemed like a stretch. “I was so excited for that pitch and it was just so absurd,” the investor says. “He just rambled, no deck, no memo.”

By the end of the pitch, the VC wasn’t convinced. “We left that pitch with more questions than answers. And it's so jarring to hear that from somebody with such merit and stature in the industry,” they say.

Despite no near-term plans to launch products, let alone make any money off them, Silver ultimately raised $1.1 billion in seed funding for Ineffable Intelligence. The fundraise, which was touted as Europe’s largest seed round ever, valued the nascent startup at a whopping $5.1 billion valuation.

At least, that’s what the headlines said.

In reality, the company raised funding in two tranches. In the first, Ineffable raised $11 million from Sequoia and other investors, valuing the startup at about $55 million pre-money, according to company filings. But within a month or so, the company raised an additional $1.1 billion at a much, much higher valuation of $4 billion pre-money — the price paid by investors like Lightspeed, Index Ventures and DST Global. That’s over 70 times the price for the same company, just weeks apart.

Sequoia got a significant discount by buying into the first tranche, though it also invested in the second one as well. The majority of the capital Sequoia invested was at the higher valuation, according to a person familiar with the deal. Sequoia and Ineffable Intelligence declined to comment.

Tranched rounds like this have become increasingly common in the AI funding frenzy, especially for neolabs— companies that raise billions of dollars right out of the gate to focus on frontier research instead of developing products. Building an AI lab requires tons of GPUs, meaning they need to raise massive amounts of capital right out of the gate to carry out serious research. Because these founders need to raise so much, lead investors wanted better terms in return, says Zach DeWitt, a partner at Wing VC.

“At some point there'll be some pushback from VCs, but the market's so hot right now that you have no other choice really if you want to get exposure to some of the best companies,” he says.

But tranched rounds are now also prevalent across other types of AI startups like infrastructure and application business. Baseten, which provides infrastructure and compute to businesses building and running AI tools, recently raised $1.5 billion in funding across two tranches, one at a $11 billion valuation and another at a $13 billion valuation. Other buzzy AI startups like Aaru and Serval have also raised funding in this manner, multiple sources told Forbes. “It’s very common among valuation maximizing founders,” one venture capitalist says.

“In a market where fundraising runs on vibes, a billion-dollar headline is worth a lot more than an accurate one.”

It’s a win-win for both startups and VCs, some investors say. Early-stage founders are shopping for sky-high valuations to hype up their startup, earning flashy headlines that could help land deals, close future funding rounds, and importantly, win over top talent who often are fielding competing offers. Equity makes up a meaningful part of an employee's package and the startup’s valuation often is a deciding factor. That’s also true for founders who could be billionaires based on these elevated valuations, but often face a long wait for their equity to fully vest.

“In a market where fundraising runs on vibes, a billion-dollar headline is worth a lot more than an accurate one,” Jaya Gupta, a partner at Foundation Capital told Forbes.

The startup’s actual worth is usually the blended valuation, a weighted average of the valuations based on the equity given up in each tranche. That number usually goes unreported, Amplify partner Sarah Catanzaro says. Because the structure of these rounds is not shared publicly, the big, topline number gives the impression that a blue chip firm like Sequoia has so much conviction in the startup that it is willing to value it very highly — when the reality is much more nuanced.

“In the last 6 months I’ve seen a half dozen rounds where Sequoia invests in 2 tranches,” Mercor CEO Brendan Foody posted on X in early June, calling it the “Sequoia Scam.” “Everyone pretends they only did the higher valuation. Founders misrepresent this to their employees & then shop it to angels too.” Foody declined to comment beyond his X post.

In a reply to Foody’s post on X, Sequoia partner Shaun Maguire said it’s “unfair to call it the Sequoia Scam, adding that it has happened five times during his seven-year run at Sequoia. “What happens is other investors are willing to pay a high [price] for a hot company (usually AI),” he wrote. “That’s multiples above what we’re willing to pay.”

There’s a clear reason for a firm like Sequoia to do this – they get to back a star-studded team with just a concept at a lower price, getting more ownership that helps justify their investment and generate returns. And like in the case of Ineffable Intelligence, they could score up to a 70x markup before the ink is even dry on their own investment.

There’s big money involved. Menlo Ventures partner Deedy Das in May tallied up that over 63 neolabs were collectively valued at more than $300 billion and raised about $48 billion. It’s not known if all the neolabs have used tranched rounds, but the funds they have raised account for 16% of the roughly $283 billion that was invested in startups other than OpenAI or Anthropic over the last year.

“At some point there'll be some pushback from VCs, but the market's so hot right now that you have no other choice really if you want to get exposure to some of the best companies.”

The lead investor who does the first tranche typically helps orchestrate the entire round, serving as a signal to strategic investors like Nvidia, Google or Microsoft that the startup holds promise. These large corporate investors are said to be less price sensitive because big checks will soon convert into chip contracts and cloud deals. Now bluechip VCs are also encouraging startups to raise the second tranche of funding simultaneously, using their brand name to ramp up interest in the funding round. “You can create some competition and urgency,” says Gupta.

But why would two VC firms pay a different price for the same startup? Funds that missed the boat on AI juggernauts like OpenAI and Anthropic see neolabs as a way to place their bets on the next wave of cutting-edge startups in a cutthroat market where it’s hard to get into the best deals. Even if the startup doesn’t have great business prospects, there’s so much demand that investors can sell their stake in the portfolio company at a higher valuation in the secondary market, in what’s being called a “pump and dump” round. But they could also strike gold, backing the next OpenAI or Anthropic.

The money isn’t just flowing in from Silicon Valley venture capitalists and tech giants. Silver’s Ineffable Intelligence was backed by the United Kingdom’s new Sovereign AI fund and the British Business Bank. The $670 million fund, which launched in April, and the development bank are both supported by money from British taxpayers. It’s not clear what valuation they invested in Ineffable. Sovereign AI and the British Business Bank did not respond to Forbes’ request for comment.

But employees factoring in these numbers while deciding which startup to join risk getting the short end of the deal. Those who come on board after a round is announced could end up paying a bigger strike price for their options that’s close to the higher valuation, rather than the company’s blended valuation. “They’re taking more of the risk and capturing less of the upside,” Gupta says. “The social contract that made startup equity compelling is eroding and most candidates don't realize it until the exit happens (or doesn't).”

For neolabs like Ineffable Intelligence, structuring funding rounds this way makes sense. They get to pick the investor they want and are able to raise gobs of cash. After all, reinforcement learning pioneer Silver knows his venture is a gamble.

“There will be a significant risk of failure for a chance of spectacular success that will positively transform the course of AI and thereby humanity,” reads a blog post from January on the company’s website.

Anna Tong contributed reporting.

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