Artificial intelligence (AI) and machine learning continue to generate significant investor interest, with buyers eagerly seeking out shares of promising start-ups in alternative venues even before they go public.
The current investor frenzy surrounding AI start-ups on secondary markets suggests a growing recognition of the industry's transformative potential.
But while start-ups face challenges in going public, the secondary market offers an alternative avenue for investors to secure shares in promising AI companies.
Private market for AI booming
According to EquityZen Securities, a marketplace for privately held shares, AI and machine learning have consistently accounted for 25 to 30% of investor interest in each month of 2023.
Rainmaker Securities, a platform facilitating secondary stock transactions for private businesses, has witnessed investors paying a premium for shares of companies such as OpenAI and Anthropic, recognised as industry frontrunners in AI.
Brianne Lynch, head of Market Insight at EquityZen, revealed that institutional investors were becoming increasingly aggressive, while transactions among retail investors in AI companies had also experienced an upswing from May to June.
Glen Anderson, co-founder of Rainmaker, highlighted the growing number of buyers outpacing sellers, resulting in prices surpassing earlier funding rounds. Bidders for Anthropic were willing to pay a premium of up to 25% compared to its recent round, while bids for OpenAI had reached the $80s, up from a previous round priced at $67.
Surge in demand
Forge Global Holdings has witnessed a surge in demand for AI firms on its platform, partly driven by Microsoft's investment in OpenAI and a funding round for Anthropic. Data from the company indicates that buying interest in a cluster of seven AI companies, including OpenAI, reached its highest level in June.
This heightened interest in nascent AI firms contrasts sharply with the broader trend of start-ups trading at significant discounts. In a climate of tech job cuts, a sluggish market for initial public offerings (IPOs) and rising interest rates, cash-strapped founders, employees and investors are under pressure to sell shares.
As companies explore ways to leverage AI technology, the sector has emerged as a promising industry with considerable growth potential, attracting substantial investor attention – and because early-stage AI firms lack the financial reports necessary for a public listing, there is pent-up demand in the secondary market.
EquityZen's Lynch explained that investors were flocking to the secondary market because it was difficult to access these companies through traditional means. Investors on EquityZen must meet the Securities and Exchange Commission's definition of an accredited investor.