I got off a call recently with a very nice and talented founder running a company that had been around for about four years. Solid team, interesting technology, good investors, but still early revenue. Typical of many promising AI companies, two years ago it raised $10 million at a $40 million valuation, even though at the time the company had no revenue. The founder and the company’s investors are now aiming for an exit that will exceed their previous valuation.
I can definitely understand their logic in wanting a valuation that builds on top of the previous valuation. I also understand that they have strong underlying tech, a good team and the belief that the right buyer would see the potential upside.
And to be fair, there are cases that support this line of thought.
But in the current AI cycle, we’ve seen transactions that look disconnected from fundamentals.
Microsoft structured a roughly $650 million licensing and talent deal with Inflection AI, effectively bringing in most of the team and its technology. Amazon has done similar deals around AI startups, combining technology access with hiring key teams. Google and others have been active in this space as well.
In rare situations, they can be replicated. When they are, they can lead to exceptional outcomes and everyone involved would welcome that. But they cannot be the working assumption.
The main reason I decide to walk away from a deal is simply because expectations are not aligned with how M&A actually works. If we are not aligned on that from the beginning, I am setting myself up for failure.
Here are the patterns I see most often:
1. Narrative without enough proof
Founders tend to focus on what the company can become. Buyers focus on what has already been demonstrated. Technology and vision matter, but they need to be supported by real signals: Revenue quality, growth, retention and how easily the product fits into a buyer’s ecosystem all carry weight.
When expectations are built mainly on potential, the gap becomes hard to close.
2. Using exceptional outcomes as reference points
The market always has headline deals that shape perception, especially in AI. While these examples are real, we cannot use them as a baseline.
Most transactions are still priced on traction, growth and strategic fit. When a process is anchored on rare outliers, it is likely doomed to fail.
3. Capital raised vs. commercial reality
When a company raises capital at a certain valuation, it sets a reference point. Founders and investors expect the next outcome to build on that. Buyers look at something else entirely. Current performance and future synergies. If the business has not grown into the expectations created by earlier funding rounds, a gap forms, and it is a gap we need to address.
Itay Sagie is a strategic adviser to tech companies and investors, specializing in strategy, growth and M&A, a guest contributor to Crunchbase News, and a seasoned lecturer. Learn more about his advisory services, lectures and courses at SagieCapital.com. Connect with him on LinkedIn for further insights and discussions.
Illustration: Dom Guzman