Venture capitalists are sounding alarm bells about an AI investment bubble that could burst in 2026, despite record-breaking funding rounds throughout 2025. Deedy Das, a partner at Menlo Ventures specializing in AI and machine learning, warns that “2026 will be a year of reckoning,” noting that nearly 20 companies with billion-dollar valuations are generating zero revenue.
The AI startup funding landscape has reached unprecedented levels, with nearly 700 seed-stage rounds exceeding $10 million in 2025—an all-time high according to Crunchbase data. This represents a dramatic departure from the typical $2.5 million seed round. High-profile examples include former OpenAI CTO Mira Murati raising $2 billion at a $10 billion valuation with minimal details about her plans, and now reportedly in talks for a $50 billion valuation. Similarly, Eric Zelikman, a former xAI researcher, is raising $1 billion at a $4 billion valuation, while Naveen Rao’s Unconventional AI secured $475 million in seed funding at a $4.5 billion valuation.
The frenzy is driven by FOMO (fear of missing out) among major venture capital firms desperate not to miss “the next OpenAI,” according to Steve Brotman of Alpha Partners. This has created a founder-friendly market where top AI talent holds all the leverage, forcing VCs to pitch themselves rather than the other way around. The competition has led to reduced due diligence and less information-gathering, creating what Sapphire Ventures partner Cathy Gao calls “a little bit of a dangerous situation.”
Joanne Chen of Foundation Capital expressed concern about inexperienced founders—some too young to legally drink—raising “crazy rounds with zero work experience” simply because they emerged from AI labs. She predicts “a bloodbath over the coming years” as many of these companies fail to deliver.
The concerns extend beyond private markets. Public markets have shown volatility, with stocks like Coreweave and Nvidia experiencing sharp declines amid worries about trillions spent on AI data centers. Even OpenAI CEO Sam Altman has acknowledged we’re in a bubble, drawing comparisons to the dot-com boom of the late 1990s.
Despite the warnings, VCs remain optimistic about AI’s long-term potential, citing real revenue, profitability, and economic value—unlike the 2000 dot-com bubble. They believe exceptional companies will emerge from this cohort, justifying the current investment frenzy.
Key Quotes
2026 will be a year of reckoning. When you see almost 20 companies I can think of that have a billion-dollar post-money valuation that make no revenue, I don’t think it takes a genius to know that not all of them can work.
Deedy Das, partner at Menlo Ventures focused on AI and machine learning, warns about unsustainable valuations in the AI startup ecosystem, predicting a market correction in 2026.
There’s definitely an element that the bigger VCs have FOMO of missing the next OpenAI. If you’re one of these bigger funds, you’re paid to be in the next OpenAI, and if there’s any chance a company is the next OpenAI, it could be worth paying billions.
Steve Brotman, managing partner at Alpha Partners, explains the psychological driver behind inflated AI startup valuations—venture capitalists’ fear of missing out on the next major success story.
It’s not like these founders have magically learned how to build businesses. I suspect we’ll see a bloodbath over the coming years as some of these companies don’t succeed.
Joanne Chen, general partner at Foundation Capital, expresses concern about inexperienced founders from AI labs raising massive funding rounds without business experience, predicting widespread failures.
Investors are getting less information and less face time with the team, and you have to make a decision, take it or leave it. It creates a little bit of a dangerous situation.
Cathy Gao, partner at Sapphire Ventures, describes how the competitive funding environment has led to reduced due diligence, creating systemic risks in AI investments.
Our Take
This article captures a pivotal moment where AI investment euphoria collides with economic reality. The parallels to the dot-com bubble are striking but not identical—today’s AI companies are generating real revenue and demonstrable value, unlike many 1990s internet startups. However, the warning signs are legitimate: zero-revenue companies commanding billion-dollar valuations, founders raising funds before incorporation, and systematic abandonment of due diligence all suggest market irrationality.
What’s particularly concerning is the concentration of risk. When VCs compete primarily on speed rather than analysis, capital flows to brand names and pedigrees rather than viable business models. The real test will come when these startups need follow-on funding or face competitive pressure from established players with deeper resources. The “Power Law” venture capitalists cite—where a few winners compensate for many losers—works only if the winners are truly transformative. The 2026 reckoning may ultimately prove healthy, separating sustainable AI businesses from speculative bets and establishing more rational market dynamics.
Why This Matters
This story reveals a critical inflection point for the AI industry as it transitions from hype-driven speculation to market reality. The unprecedented funding levels and sky-high valuations without corresponding revenue represent a sustainability crisis that could reshape the AI startup ecosystem in 2026. For the broader tech industry, this signals potential market corrections that could affect everything from talent acquisition to infrastructure investments.
The implications extend beyond Silicon Valley—businesses integrating AI solutions need to assess vendor stability, while workers in AI startups face uncertain futures if the predicted “bloodbath” materializes. The reduced due diligence and FOMO-driven investments suggest systemic risks that could trigger a broader tech market correction, affecting pension funds, institutional investors, and the overall economy.
This also represents a maturation moment for AI: separating genuinely transformative companies from those riding the hype wave. The outcome will determine which AI applications and business models prove viable, shaping the technology’s trajectory for the next decade and influencing regulatory approaches to AI investment and development.
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Source: https://www.businessinsider.com/vc-fomo-a-reckoning-might-be-coming-in-2026-2025-12