- In a recent tweet, Graham said he believes all the good AI companies to invest in are still private.
- This, he said, leaves few options for those public market investors wanting to invest in AI.
Paul Graham says public market investors are missing out on a potential way to get in on the AI boom, since all the good companies to invest in are still private.
The famed venture capitalist, entrepreneur and cofounder of startup accelerator Y Combinator tweeted that those who invest in the public markets – which includes anyone who can access a stock trading account on Robinhood or Charles Schwab – have few options if they want to invest in an AI company.
Graham argues that AI is the "first big wave of technology" since startups started going public later, which results in "a unique problem."
—Paul Graham (@paulg) June 2, 2023
Since many AI startups are still relatively new – most have been founded within the past five years or so – they rely mainly on private funding from investors like venture capitalists or private-equity firms to fund their operations and help them grow over time. The everyday retail investor probably doesn't have the kind of cash or access to invest in these companies directly.
And the typical pathway to the public stock market can take several years and most AI companies haven't achieved the type of scale and revenue necessary to make the transition to that market. It's also not a great time for a company to go public. The current volatile state of the IPO market makes it less appealing, even for the biggest and most successful private companies, like payments giant Stripe or grocery delivery startup Instacart, to go public.
This is the unique problem that Graham references and he believes there are only two ways to satisfy the public demand for AI companies: an already public company will "claim" they are now an AI company by buying an AI startup or AI startups will hit the public markets much quicker than expected.
Neither scenario, according to Graham, may produce a good investment since those companies choosing the first route are playing to public market opinion, while those settling for the second could probably find a private investor willing to give them the kind of capital they're looking for.
But some disagree with Graham's assessment, arguing that a public stock market investor could buy into companies like Nvidia, Microsoft, Alphabet or Meta, and get the kind of AI investing exposure they seek.
AI-related stocks have soared on the public markets this year, but new research from Vanda Research shows that institutional investors are driving the upswing. Retail investors, however, "remain on the sidelines" the research firm said in its note.
Nvidia, the public company originally known for producing computer chips that power things like graphics for computer games, now also produces chips that power generative AI, where users can create text and images with simple prompts. It's the technology that underpins applications like ChatGPT, Google's Bard and others. Wall Street recently took notice and helped catapult the company's worth briefly to $1 trillion, joining other big tech giants like Amazon, Apple, Microsoft and Alphabet in that club.
And Microsoft has plans to pump $10 billion into AI startup OpenAI, the makers of ChatGPT and DALL-E, and is integrating the company's technology into many of its tools. While Google has an AI chatbot of its own called Bard. And, these big tech companies have venture arms of their own that invest in AI startups. For instance, Google recently led a $100 million round in generative AI startup, Runway, Insider reported.
Yet, private investing in AI startup innovations may be where the biggest potential for a huge windfall, as Graham alludes to. Since OpenAI released ChatGPT to the masses last fall, investors have been keenly interested in AI, and specifically, generative AI.
In the first quarter alone this year, generative AI startups raked in about $1.7 billion in VC funding, according to PitchBook data, and that doesn't even account for an additional $10.7 billion worth of deals that were announced but haven't closed.
Three years ago during the same quarter, data shows the funding was just $250 million.