The New Kingmaking in AI: How VCs Are Picking Winners Before Product-Market Fit

The venture capital landscape in artificial intelligence has entered a new era of speculative grandeur. As of 2025, global VC investment in AI startups has surged to $89.4 billion, with nearly half of all venture capital dollars flowing into AI despite only 18% of funded companies being in the sector according to a 2025 report. This represents a dramatic shift from the cautious post-2021 funding environment, where liquidity constraints and high valuations made investors wary of early-stage bets. Yet, in the past two years, VCs have embraced a strategy of "kingmaking"-strategically over-investing in pre-product-market fit (PMF) AI startups to secure dominance in a sector poised for exponential growth.

The Surge in AI Funding: A New Paradigm

The most striking evidence of this trend emerged in Q1 2025, when a single $40 billion AI deal catalyzed a 28% quarter-over-quarter surge in VC activity, pushing total VC-backed funding to $80.1 billion. This was not a one-off anomaly but part of a broader pattern: AI accounted for 74% of all venture capital investment in 2025, with the top 1% of AI startups capturing over a third of total funding. Firms like Andreessen Horowitz, Sequoia Capital, and a16z have concentrated their bets on AI infrastructure and application-layer companies, including OpenAI, Anthropic, and xAI, which secured multi-billion-dollar rounds at historic valuations.

This over-investment is not limited to late-stage rounds. Early-stage funding, though modest in growth, has seen a handful of pre-PMF startups raise staggering sums. For instance, Periodic Labs secured a $300 million seed round led by Felicis and a16z. Similarly, Anysphere raised $2.3 billion in November 2025, valuing the company at $29.3 billion. These figures underscore a willingness among VCs to bet on unproven AI models with speculative but potentially transformative use cases.

The logic underpinning these investments hinges on three pillars: valuation premiums, market-specific disruption, and strategic moats.

1. Valuation Premiums: AI startups command average valuations 3.2x higher than traditional tech companies. This premium is justified by the sector's potential for exponential scaling. For example, Cursor achieved $500 million in annualized revenue within its first year, far outpacing the 60-month median for traditional SaaS companies. Such metrics validate the belief that AI can compress growth timelines.

2. Market-Specific Disruption: VCs are prioritizing startups that address large, industry-specific problems. In healthcare, Ambience Healthcare raised $243 million in a Series C round led by Oak HC/FT and a16z, leveraging AI to optimize clinical workflows. In infrastructure, Cerebras Systems secured $1.1 billion for its AI chips, addressing the skyrocketing costs of training large models. These bets reflect a focus on verticals where AI can create defensible, high-margin solutions.

3. Strategic Moats: Investors like Kevin Mahaffey and Gaurav Jain emphasize the importance of "audacious ideas" with long-term potential. Startups such as Lambda and TensorWave, which build cheaper and faster AI infrastructure, exemplify this approach. By targeting foundational layers of the AI stack, these companies aim to establish winner-take-all dynamics.

Risks and Market Realities

Despite the optimism, this strategy carries risks. Seed-stage funding has hit a multi-year low in 2025, as investors grow selective about pre-PMF bets. The high valuations of the early 2020s have created a "liquidity vacuum," making it harder for new startups to justify their worth without clear traction. Moreover, technical due diligence for AI startups is increasingly rigorous, with investors scrutinizing data quality, model performance, and ethical considerations.

Yet, the market's appetite for consolidation and strategic exits remains strong. Global startup M&A activity in H1 2025 exceeded $100 billion, with deals like Google's $32 billion acquisition of Wiz and OpenAI's $6.5 billion purchase of Jony Ive's AI startup Io signaling a robust exit environment. This suggests that even if some pre-PMF bets fail, the ecosystem is structured to reward early winners through acquisitions or IPOs.

Conclusion: The Future of AI Kingmaking

The current wave of VC over-investment in pre-PMF AI startups reflects a high-stakes gamble on the sector's transformative potential. While the risks are significant, the rewards for early movers could be unparalleled. As North America continues to dominate AI funding (58.1% of global investment in 2024), the next phase of this trend will likely see further consolidation, with only a handful of startups emerging as category leaders. For VCs, the key to success lies in identifying not just technically viable ideas, but those with the strategic depth to redefine entire industries.