VCs are questioning the neolab math

Hello. It’s Ben Bergman in Venice Beach. I’ll be in New York next week for The Long Play: Stories of Reinvention, where I’ll interview Nadia Carlson, who is trying to turn Allbirds into an AI infra company. But first, I’ll dive into the neolab debate, and Katie has the deets from Menlo Venture’s black-tie 50th-anniversary soiree.

Mentioned in this edition: Jeff Dean, Ilya Sutskever, Mira Murati, Thinking Machines Lab, Matt Murphy, Menlo Ventures, Deedy Das, Aaron Rosenberg, Radical Ventures, Andrew Schoen, NEA, Jeffrey Katzenberg, Venky Ganesan, and Michael Grimes.

VCs are questioning the neolab math 

Ben here. Up until recently, it was a great time to be the founder of a neolab, the lavishly funded, research-first AI startups founded by top talent who defected from the likes of OpenAI or Google DeepMind.

We reported last month that Jeff Dean, Google’s former chief scientist, is seeking a valuation as high as $50 billion for his new AI science startup. 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. 

But lately, in conversations with multiple VCs around Silicon Valley, there is a growing divide about whether neolabs can make the economics work with their multibillion-dollar price tags and formidable competition from frontier labs. 

One VC at a top firm, who asked that I not use his name, told me 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. 

When I recently asked Menlo Ventures partner Matt Murphy at Business Insider’s Growth Mode conference which sector he thought was most overhyped, he immediately cited neolabs, which was noteworthy, given that Menlo invested in some of them.

Murphy pointed to an example from his time as an early board advisor at Google, which he said did so well 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 told me. “That's the risk of what's going on now with companies raising such large rounds.”

Another Menlo partner, Deedy Das, posted last month about the “difficult game” of making neolab math work. 

Das seemed a bit taken aback by the reaction to his post and later texted me: “Like all startups, many will fail, some will work.”

Picking which ones will work is why VCs get paid the big bucks. 

Neolabs are a power-law bet taken to an extreme, Radical Ventures’ Aaron Rosenberg told me. 

Investors know most will likely burn enormous sums on compute and talent without ever becoming profitable. But the rare winner 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.”

Like Radical, New Enterprise Associates wrote a bullish view in June. One of the authors, Andrew Schoen, told me his views have not 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.

The Buzz

Katie here. Many of tech’s biggest names gathered at the Ritz-Carlton in San Francisco on Saturday, at a black-tie event in the name of Menlo Ventures' 50th anniversary. 

Hollywood titan turned venture capitalist Jeffrey Katzenberg of Dreamworks fame asked the audience to join a prayer “for the blockbuster IPO of Anthropic,” a joking reference to Menlo’s early investment in the company. 

I also spotted Morgan Stanley’s storied technology banker Michael Grimes, who is undoubtedly holding his own AI IPO prayers. Other attendees included an array of public company and startup CEOs, including those from Snowflake, Zscaler, Legora, and OpenRouter.

As Menlo partner Venky Ganesan quipped, there was more AUM (assets under management) in the room than in many countries, given the attendees' net worth and the investment capital they manage. 

Menlo isn’t the first venture firm to host a splashy anniversary party; Index Ventures recently went big for its 30th anniversary.

A person at a rival venture shop expressed disappointment that their firm doesn’t host such celebrations.

Menlo’s night ended with concerts from two super confidential Grammy Award winners trying to rake in those AI bucks!

Around the Cap Table

• We reported this week that Fireworks AI is seeking fresh funding at a valuation of between $30 billion and $40 billion, a dramatic jump just months after its last blockbuster round was closed.
• "You Can See Everything" has everyone talking. Ben thought it was absolute genius, if a bit long. It will make this year's Oscars race exciting. See it in theaters before the experience is lessened by spoilers.
• Our colleague Rya Jetha explored the excitement and pitfalls of investing in robotics startups. Like neolabs, robotics companies are commanding big valuations with little to show for it, yet. 
• Foursquare’s $0 acquisition ended with no payout for employees or investors, according to founder Dennis Crowley.

Post of The Week

There are only 130 US tech companies, public or private, valued at $10B or more (decacorns). That’s roughly 20 to 30 new companies per decade, for the last five decades. This year alone, with a quarter to go, there have been 42 decacorns minted privately. Either this is the most economically transformative event since the industrial revolution, or we’re getting a wee bit ahead of ourselves.

— Rory O'Driscoll (@rodriscoll) October 21, 2026

The VC Insider team

Ben Bergman, chief correspondent, in Los Angeles. Katie Roof, editor at large, in San Francisco. Pranav Dixit, senior technology editor, in San Francisco. Leena Rao, executive editor, in Los Angeles. Get in touch.

Email us at [email protected]