VCs Split Over Neolab Math as AI Startup Valuations Hit $50 Billion

Jeff Dean's new AI science startup is seeking a valuation as high as $50 billion — and some of Silicon Valley's top investors are starting to ask whether that math works at all.

Dean, Google's former chief scientist, is chasing that figure just months into his company's life, Business Insider reported in September. He's not alone. OpenAI cofounder Ilya Sutskever's Safe Superintelligence is worth $32 billion. Another OpenAI alum, Mira Murati, is raising a round for Thinking Machines Lab at a valuation of around $40 billion.

These lavishly funded, research-first AI startups — founded by defectors from OpenAI and Google DeepMind — are now the most contested trade in venture capital. In conversations with multiple VCs around Silicon Valley, a growing divide has opened over whether these so-called neolabs can make the economics work against multibillion-dollar price tags and formidable competition from frontier labs.

How divided are investors?

One VC at a top firm, who declined to be named, told Business Insider's Ben Bergman that neolabs are the most hotly debated type of investment right now.

"Some would say you shouldn't invest in any, and others would say this is basically all you should be investing in because software's dead, and you either have to own models or hardware, and even if you enter at a billion, the company could be worth a trillion," he said.

Menlo Ventures partner Matt Murphy named neolabs the most overhyped sector when asked at Business Insider's Growth Mode conference — a striking call, given that Menlo has invested in some of them.

Murphy drew on his time as an early board advisor at Google, which he said succeeded because it "was like a match thrown into a bonfire."

"The opposite thing you want to do is start a match with a bonfire," Murphy said. "That's the risk of what's going on now with companies raising such large rounds."

His colleague, Menlo partner Deedy Das, posted in September about the "difficult game" of making neolab math work. Das seemed taken aback by the reaction and later texted: "Like all startups, many will fail, some will work."

Why are investors still writing checks?

Neolabs are a power-law bet taken to an extreme, Radical Ventures' Aaron Rosenberg said. Investors expect most of these companies to burn enormous sums on compute and talent without ever turning a profit. The rare winner, though, could become a foundational AI company worth hundreds of billions or more.

"We're confident that the best neolabs will attract ongoing support," Rosenberg said. "Talent continues to transition out of the incumbents and academia into founder roles, and we see no signs of that slowing."

New Enterprise Associates took a bullish position in June, and co-author Andrew Schoen said his views haven't changed. "There are neolabs I know of that are finalizing billion-plus-dollar rounds of equity financing, and those processes are moving very smoothly and quickly," he said.

Menlo's 50th draws Katzenberg and an Anthropic prayer

Tech's biggest names gathered at the Ritz-Carlton in San Francisco on Saturday for Menlo Ventures' black-tie 50th-anniversary party. Jeffrey Katzenberg, the DreamWorks cofounder turned venture capitalist, asked the audience to join a prayer "for the blockbuster IPO of Anthropic" — a joking nod to Menlo's early investment in the company.

Morgan Stanley's veteran technology banker Michael Grimes was also in the room, along with CEOs from Snowflake, Zscaler, Legora, and OpenRouter. Menlo partner Venky Ganesan quipped that there was more AUM in the room than in many countries. The night closed with concerts from two unnamed Grammy Award winners.

Menlo isn't alone in the anniversary arms race. Index Ventures recently threw its own large party for its 30th.

Elsewhere on the cap table

• Fireworks AI is seeking fresh funding at a valuation between $30 billion and $40 billion, months after closing its last blockbuster round.
• Foursquare's $0 acquisition left employees and investors with no payout, according to founder Dennis Crowley.
• Business Insider's Rya Jetha examined the promise and pitfalls of robotics investing, where companies are commanding big valuations with little to show for it yet.

Investor Rory O'Driscoll put the moment in context in an October 21 post: only 130 US tech companies, public or private, are worth $10 billion or more — roughly 20 to 30 new ones per decade for five decades. This year alone, with a quarter remaining, 42 decacorns have been minted privately. Either this is the most economically transformative event since the industrial revolution, he wrote, "or we're getting a wee bit ahead of ourselves."