VCs deploy ‘kingmaking’ strategy to crown AI winners in their infancy

In a groundbreaking move, AI enterprise resource planning (ERP) startup DualEntry secured a massive $90 million Series A funding round led by Lightspeed and Khosla Ventures in early October. This investment valued the one-year-old company at an impressive $415 million, signaling strong confidence from top-tier VCs in its potential.

DualEntry aims to revolutionize the ERP industry by offering a solution that can automate mundane tasks and deliver predictive insights, positioning itself as a formidable competitor to established players like Oracle NetSuite. The substantial funding injection suggests that the startup is on a trajectory of rapid growth and innovation.

Despite skepticism from some VCs regarding DualEntry’s revenue projections, co-founder Nestares maintains that the company’s financial performance is robust and surpasses initial estimates. This discrepancy highlights the increasing trend of VCs adopting the “kingmaking” strategy, where significant capital is funneled into a chosen startup to establish market dominance early on.

The concept of kingmaking, although not new, has evolved to involve substantial funding at earlier stages of a startup’s growth. This strategic approach, as noted by industry experts like Jeremy Kaufmann from Scale Venture Partners, aims to tip the scales in favor of a selected company and solidify its position as a market leader.

This strategic funding approach contrasts with previous investment cycles, where capital injection was often used as a weapon in later stages of a startup’s development. The shift towards early-stage kingmaking reflects a new era in venture capital investment, as highlighted by David Peterson from Angular Ventures.

The competition in the AI ERP sector is fierce, with DualEntry’s rivals Rillet and Campfire AI also securing substantial funding rounds to fuel their growth and innovation. The race for market dominance in AI applications extends beyond ERP, encompassing categories such as IT service management and SOC compliance.

While the strategy of offering significant capital early on may present advantages for startups in attracting enterprise buyers and accelerating growth, it also carries inherent risks. Notable successes like legal AI startup Harvey stand in contrast to failures such as Convoy and Bird, underscoring the unpredictability of the startup landscape.

Despite the uncertainties, major VC firms continue to bet on promising AI startups, recognizing the potential for exponential growth and market disruption. The allure of early investment in transformative technologies like AI remains strong, as investors seek to capitalize on the power law dynamics that have reshaped the startup ecosystem.