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Welcome back! It’s Valida in Southern California.
The sentiment gap between public and private markets could not be wider right now. Wall Street investors have been increasingly worried about overborrowing by AI-related companies, as evidenced by skyrocketing yields on CoreWeave bonds, a selloff in semiconductor stocks and the yanking of the IPO of Firmus, the Australian data center operator.
Investors in private tech startups are still ebullient, blown away by how fast startups like Fireworks AI have grown.
This bifurcation was evident to me this week at Morgan Stanley’s annual private tech companies conference. The mutual fund and other investors fanning out across a lush seaside resort in Dana Point, Calif., were aware of the red washing over trading screens. But that didn’t prevent them from rushing to meet the dozens of startup founders there, particularly if they were in the hot defense or inference sectors.
“You can see there's a stark disconnect between the public markets and the private markets,” said Diana Doyle, Morgan Stanley’s head of technology equity and equity-linked capital markets on the sidelines of the conference.
Doyle, who lives in Silicon Valley, notes that “in the private markets, growth still trumps all, and there is a license to pursue growth,” as well as a fear of missing out.
“But we’ve seen this discipline in the public markets, where it’s no longer growth at all costs, and growth among public companies is hard to come by,” she said.
Fueling Wall Street disenchantment was the prospect of higher interests, which risks squeezing companies that borrow a lot—such as cloud provider CoreWeave. But that wasn’t the only factor souring public investors. On Wednesday, as shares of CoreWeave and rival Nebius dropped sharply, attendees were anxiously checking with colleagues for a third-quarter update from Anthropic ahead of its initial public offering next month. They got their answer shortly after 3 p.m, when news broke that Anthropic recorded $16.8 billion in revenue in the third quarter.
Investors in most five-year-old companies would have uncorked Champagne if the business hit that level of quarterly sales. But this is Anthropic, whose success selling Claude Code, Cowork and other tools boosted second-quarter revenue 140% from the first. Anthropic’s third-quarter report, up just a measly 45% from the first, instead came across as a worrisome slowdown.
The news prompted some investors to nudge Anthropic’s bankers to lower its valuation target to under $1.5 trillion, rather than the $2 trillion those bankers had floated previously. They are already fretting over the sky-high valuations some debt-saddled data center firms such as Nscale are seeking for their public offerings. Nscale, for instance, has sought to raise up to $3 billion in an IPO at a valuation of more than $35 billion, according to the Financial Times.
“I’m not sure how they can go public” at the valuations the data center companies want, one fund manager said.
The grumpiness didn’t extend to the startups that seem happy to stay private for a while. Investors at the conference were nearly tripping over themselves to meet with a coveted list of hot private companies the bank assembled such as Jeff Bezos’ rocketship company Blue Origin and Elon Musk’s brain company Neuralink.
Plus, investors were eager to meet with young but headline-grabbing companies, such as chip startup Etched, Naveen Rao’s Unconventional AI and legal AI startup Legora. Some were particularly eager to catch up with defense tech startups, such as Anduril, Hadrian and Saronic, which have already raised money at multi-billion valuations.
Many told me they were amazed by the businesses that Fireworks AI, Baseten and Fal AI have built. As we and others have reported, these startups, which sell access to AI models, have seen soaring demand as developers use more open-source AI models, which can often be cheaper than those from OpenAI and Anthropic.
These investors are wondering when the first wave of these richly-valued AI-native startups will go public. While data center companies come with mounds of debt and revenue that hinges on yet-to-be built projects, the AI native companies don’t seem to carry such drawbacks.
There are plenty of reasons for these startups to eventually enter the public markets.
“Capital is an absolutely competitive weapon, similar to semiconductors and hardware companies,” said David Chen, global head of technology investment banking at Morgan Stanley, about the AI-native startups. “Going public does give you a significant advantage, because you have access to just a wide variety of additional instruments like convertible debt.”
Assuming all goes well, of course. As Anthropic is showing, it’s hard for even A-list AI startups to show exponential growth every quarter. And public investors have a simple way of making their displeasure known.
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