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AI Startup Kingmaking: When VCs Crown Winners Before the Race Begins

#Entrepreneurship #AI Technology
8 min read
Raj Sharma
Raj Sharma Tech Entrepreneur & Digital Marketing Maverick
AI Startup Kingmaking: When VCs Crown Winners Before the Race Begins - Featured image illustration

Last week, a founder friend called me from Bengaluru, equal parts frustrated and bewildered. “Raj, we’ve been grinding for two years, growing steadily, proving product-market fit—and then this competitor appears from nowhere with $75 million in funding. They haven’t even launched publicly yet!” His voice carried the familiar note of someone watching the game change mid-play.

Welcome to the era of AI startup kingmaking, where venture capitalists aren’t just betting on winners—they’re creating them before the race even begins.

Venture capital meeting with investors reviewing AI startup pitches on screens and tablets

The New Rules of the Game
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The concept of “kingmaking” in venture capital isn’t entirely new. What’s different in 2025 is the timing and scale at which it’s happening, particularly in AI-related categories.

According to TechCrunch’s Marina Temkin, who has been tracking this trend extensively, kingmaking involves “deploying massive funding into one startup in a competitive category, aiming to overwhelm rivals by granting the chosen company a bank-account advantage so significant that it creates the appearance of market dominance.”

The shift is dramatic. “Venture capitalists have always evaluated a set of competitors and then made a bet on who they think the winner is going to be in a category,” explains Jeremy Kaufmann, a partner at Scale Venture Partners. “What’s different is that it’s happening much earlier.”

In the 2010s, this capital weaponization happened at Series C or D—companies like Uber and Lyft were well-established before the massive war chests appeared. Today? We’re seeing it at seed and Series A rounds, sometimes before companies have meaningful revenue.

Case Study: The AI ERP Wars
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To understand how this plays out practically, look at the AI ERP (Enterprise Resource Planning) category. DualEntry, a startup building AI-powered accounting software to replace legacy systems like Oracle NetSuite, recently closed a massive funding round from top-tier VCs despite reportedly having modest revenue.

One investor who passed on the deal told TechCrunch that DualEntry’s annual recurring revenue was around $400,000 when reviewed in August 2025—a number the company disputes, though they haven’t provided specifics. Yet the valuation? In the billions.

The logic? If AI ERP becomes a massive category—and the thesis is compelling—then early dominance matters more than current revenue. Well-funded startups are perceived as more likely to survive by enterprise buyers, making them the preferred vendor for significant software purchases. It’s a self-fulfilling prophecy, funded into existence.

Why This Matters for Indian Entrepreneurs
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As someone who built his business from nothing—literally selling chai to starting my first company—I watch these dynamics with a mix of fascination and concern.

The Indian startup ecosystem is directly affected by these global trends. Last week, Nexus Venture Partners announced their new $700 million fund, explicitly balancing AI investments with India-focused bets across consumer, fintech, and digital infrastructure.

“AI is a huge inflection point, and we are anchoring on that,” Jishnu Bhattacharjee, a managing partner at Nexus Venture Partners, told TechCrunch. “But we are also seeing that many of these AI innovations are actually getting used to serve the masses better.”

For Indian founders, this creates both opportunity and challenge. The opportunity: global capital is flowing into AI at unprecedented rates, and India’s talent pool, rising digital infrastructure, and demand for localized solutions make it an attractive market. Companies like Zepto and emerging infrastructure players like Neysa are demonstrating how AI-native businesses can thrive here.

The challenge: competing against companies that have been “kinged” with massive capital before proving their worth becomes exponentially harder. When your competitor can afford to operate at a loss indefinitely while you’re bootstrapping profitability, the playing field isn’t level.

The YOLO Problem
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Perhaps the most telling commentary on this phenomenon comes from an unexpected source: Dario Amodei, CEO of Anthropic.

In a recent interview, Amodei discussed the economics of AI investments with remarkable candor. While declining to definitively label current conditions a “bubble,” he warned about companies that are “YOLO-ing”—taking unwise risks in a race to capture AI market share.

“There’s an inherent risk when the timing of the economic value is uncertain,” Amodei explained. “And then I think there are some players who are ‘YOLO-ing,’ who pull the risk dial too far, and I’m very concerned.”

The Anthropic CEO, whose company has grown revenue from zero to potentially $8-10 billion in just three years, emphasized the importance of conservative planning. The question isn’t whether AI will generate value—it almost certainly will. The question is whether the timing assumptions built into today’s valuations will hold.

“I don’t know if a year from now, if it’s going to be 20 billion or if it’s going to be 50… it’s very uncertain,” Amodei admitted. “I try to plan conservatively.”

The Power Law Justification
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So why are sophisticated investors pouring billions into companies with minimal revenue? The answer lies in what David Peterson, partner at Angular Ventures, describes as a lesson from the previous decade:

“Everybody has fully internalized the lesson of the power law. In the 2010s, companies could grow faster and be bigger than almost anybody had realized. You couldn’t have overpaid if you were an early Uber investor.”

This logic has created a new calculus where being early in a potential category winner matters more than traditional metrics. If AI ERP (or AI legal tools, or AI recruiting) becomes a multi-billion-dollar category, owning the market leader matters infinitely more than the price paid for that position.

Consider Harvey, the legal AI startup that recently confirmed an $8 billion valuation. Founded in 2022, it may be far enough ahead of competitors—in both customer acquisition and training data from working with major law firms—that it represents a genuinely defensible position. Harvey’s story began with a proof of concept about landlord-tenant law and a cold email to Sam Altman. It became one of OpenAI Startup Fund’s first investments and has been a VC darling ever since.

What This Means for the Rest of Us
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If you’re a founder without access to this level of capital—which is most of us—what do you do?

First, recognize that capital isn’t the only competitive advantage. The most well-funded competitor doesn’t always win. MySpace had capital; Facebook had better execution. Ask anyone who remembers Jet.com competing with Amazon whether unlimited runway guarantees success.

Second, focus on niches where kingmaking doesn’t apply. Localized solutions, industry-specific applications, and markets too small for mega-funded competitors to prioritize represent genuine opportunities. Nexus specifically mentioned India’s many languages and service needs as areas where startups can build defensible positions.

Third, consider whether you’re building for acquisition rather than IPO. In a kingmaking environment, being the second or third player in a category often leads to acqui-hire or strategic acquisition by the “king.” That’s not a failure—it can be a highly successful outcome.

Finally, understand that this cycle will eventually correct. The gap between capital deployed and value created cannot expand indefinitely. When correction comes, companies with solid fundamentals and sustainable economics will be positioned to capture market share from competitors built on capital rather than competence.

The Micro1 Counter-Example
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Not every success story in AI requires kingmaking-level capital. Consider Micro1, a startup that helps AI labs recruit and manage human experts for training data. The three-year-old company reportedly crossed $100 million in ARR recently, up from roughly $7 million at the start of 2025.

Micro1’s founder, Ali Ansari (just 24 years old), built the company on a clear market insight: the demand for high-quality human data to train AI models is exploding. “There are Harvard professors and Stanford PhDs spending half their week training AI through Micro1,” Ansari explained. “But the bigger shift is in the sheer volume and range of roles.”

The company’s growth came from execution, not capital flooding. They identified a real need, built systems to address it, and scaled as demand grew. That’s the entrepreneurship I recognize—the hustle-and-prove-it model that built most successful companies in history.

The Long View
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As someone who grew up watching Bollywood films where the underdog always wins, I’d love to tell you that pure merit always triumphs. Reality is messier.

Kingmaking is real. Capital advantages compound. The game has changed.

But markets also have a way of humbling those who mistake funding for fundamentals. The companies built on assumptions of eternal growth and unlimited capital availability are taking real risks—risks that even Anthropic’s CEO acknowledges could lead to “bad things” for some players.

For Indian entrepreneurs, for bootstrapped founders, for anyone building without access to the kingmaking playbook, the path forward requires adaptation without abandonment of core principles. Build real value. Understand your specific advantages. Choose battles you can win.

And remember that every era’s “insurmountable” advantages eventually yield to the next wave of innovation. The chai wallah who became a tech entrepreneur didn’t succeed by competing on capital with established players. He succeeded by understanding opportunities they couldn’t see.

The AI startup landscape is being reshaped by kingmaking capital. Understanding this dynamic is essential. Being intimidated by it is optional.

References
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AI-Generated Content Notice

This article was created using artificial intelligence technology. While we strive for accuracy and provide valuable insights, readers should independently verify information and use their own judgment when making business decisions. The content may not reflect real-time market conditions or personal circumstances.

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#venture capital #AI startups #startup funding #kingmaking strategy #entrepreneurship