AI IPO interest Is Heating Up – Just Not In the Venture Capital Market

After years of investor neglect, U.S. initial public offerings are on the rebound in 2023.

All told, 83 new IPOs have been already priced in 2023, a 29.7% gain measured against 2022, according to Renaissance Capital. Total US-based IPOs have raised $16.7 billion to date, a 156.8% gain from 2022, RC reports.

Total IPOs stand at 138 IPOs filed through the first week of October, 2023, RP states, a rise of 21.1% from 2022.

Artificial intelligence has been a major contributor to the IPO renaissance, especially with three technology IPOs that rolled out in September – all of which have generated major interest among investors.

“After a nearly two-year pause, the Initial Public Offering (IPO) markets have come to life in the second half of 2023, helped by a robust Artificial Intelligence (AI) rally, moderating inflation, and stability in interest rate policy,” said Ido Caspi, an analyst with Global X ETF.

September’s star-studded IPO lineup included Arm Holdings, Instacart, and Klaviyo, all of which generate heavy trading and all of which have strong ties to the AI market.

“We are bullish on the market opportunity in front of these companies and the themes that they represent,” Caspi says “They can provide valuable insights into emerging trends and sub-themes within the Semiconductor, AI, and Software-as-a-Service (SaaS) sectors.”

“Market volatility is likely to persist in the near term, but the success of these listings suggests a continued resurgence in IPO activity heading into 2024,” he adds.

Funding Pipeline Running Dry?

With the IPO market gaining steam and AI leading the way, why is the venture seeding side of the AI sector in decline?

A case in point.

Venture capital deals involving generative artificial intelligence fell by 27% in Q3, even as “massive investments” from big tech companies hit the VC market earlier in 2023, Pitchbook reported.

“The number of generative AI deals fell to 101 rounds in Q3, a 29% decline from Q2. Deal value was also on a downward track, but ended higher at $6.1 billion thanks to the blockbuster deal for up to $4 billion that Amazon inked with Anthropic, a provider of large language models, last month,” Pitchbook said.

Part of the problem may be time-related, as some VC deals appear to be stacking up waiting for funding that should be forthcoming – just maybe not this year.

“I consider interest to remain high and expect funding rounds to continue to get done, but a lot of that was front-loaded into Q1 and Q2 of this year, and some of the leaders in this space are now well capitalized,” Brendan Burke, Pitchbook’s senior emerging tech analyst, told CFO Dive.

While not every AI newcomer can’t develop into an OpenAI-style powerhouse, the sluggish pace of AI-fueled IPOs is concerning to investors.

“The retention and monetization are just not there,” says NFX general partner Pete Flint, adding that too many AI startups offered more sizzle than steak to experienced VC funders, in comments to Pitchbook.

Still, those same larger funding companies aren’t going away, not with billions of AI dollars on the table, which could be “scaring away” smaller investors and skittish startups.

“It’s clear that established digital incumbents and challengers are not asleep at the wheel,” Flint added.

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