Relatively few businesses ever get VC funding, but this small group often evolves into industry giants. Just five VC-funded companies—Microsoft, Google, Nvidia, Apple, and Meta—account for the entire year-to-date return of the stock market. Yet, the returns achieved in the public market pale compared to the gains realized by early-stage investors.
This illustrates how private market investors, through their early stake in these tech titans, reap substantial benefits before companies go public. The next wave of innovation—and returns—will emerge from venture investments in AI yet to debut on the public market.
AI’s Emergence as an Investment Powerhouse
AI is seeing an annual growth rate of 37%, and the market is expected to reach $407 billion by 2027. It’s no wonder, then, that investors are clamoring to take advantage.
Up to 50% of this year’s stock market gains owe to “the buzz around AI.” On the private market front, 8 new AI unicorns, or billion-dollar startups, were created by May of this year. There’s also been a 49.7% quarter-over-quarter growth in private market investment in AI.
The most-hyped (and most-funded) among these is OpenAI, a private company that landed a $10 billion round from Microsoft in January. OpenAI’s journey as an AI research lab to one of the most valued AI companies globally is a prime example of the potential private market investments hold.
Launched in 2015, its mission was ambitious: to ensure that artificial general intelligence (AGI)—highly autonomous systems that outperform humans at most economically valuable work—benefit all of humanity. The organization committed to focusing on long-term safety and technical leadership and vowed to stop competing and start assisting any value-aligned, safety-conscious project that comes close to building AGI before them.
However, in 2019, OpenAI restructured itself into a “capped-profit” model, acknowledging that it required unprecedented amounts of resources to fulfill its mission and compete with other well-funded AI research entities. This strategic shift was a pivotal moment that set the stage for significant private investment opportunities.
Microsoft’s substantial investment underscores a critical truth in today’s investment landscape: real wealth is being created in the private markets well before companies reach the public sphere.
Historically, companies would turn to the public markets for growth capital. But today, due to the ample liquidity in private markets, companies can stay private longer, scaling their operations without the added pressures of quarterly earnings and public scrutiny.
AI’s Future isn’t in the S&P500
When it comes to capturing the explosive growth of AI, traditional indices like the S&P500 are not the best investment vehicles. By the time established companies like Google make significant strides in AI, their stock prices might not reflect the kind of exponential growth that early-stage private AI companies experience.
For instance, Google tried to capitalize on the AI hype with its project, Google Bard. This project aimed at revolutionizing search through AI. However, it turned out to be a failure due to various technical mishaps, causing their market cap to drop by $100 billion. Despite Google’s 40% price surge this year, it’s still down around 17% from its peak.
Another example is IBM, which despite its early involvement in AI with the famous Watson, has struggled to monetize and keep pace with newer AI startups. In fact, IBM’s stock price hit $131 during the dot-com boom prior to Watson’s release. As of writing, it sits at $130. Clearly, being an early player in AI does not translate into stock market gains, especially for large, established companies.
This is where the private market comes into play. Companies like OpenAI, which are not yet publicly traded, represent the forefront of AI innovation and are growing exponentially. In 2020, OpenAI was valued at around $15 billion. Today, it’s worth $29 billion.
Investors looking to capitalize on AI innovation must look towards the private markets. Through venture capital and private equity investments in AI, investors can gain exposure to the high-growth potential before these companies go public and reach more mature stages of their lifecycle.