How AI is forcing startups to stay in the private market longer

This article summarizes an episode of Venture Capital’s video series featuring Scott Voss of HarbourVest Partners.

Scott Voss, a managing director at HarbourVest Partners / Photo credit: HarbourVest Partners

The arrival of ChatGPT in late 2022 shifted the business landscape. Scott Voss, a managing director at HarbourVest Partners, watches this shift closely and notes that investors are now questioning if older technology companies can even survive.

To survive this unstable period, businesses are altering their growth strategies. Voss argues that companies need to build their strength away from the public eye. By relying on private funding, a business can grow at its own pace without the constant pressure of the stock market.

A new timeline for going public

Avoiding the stock market allows leaders to focus on the future instead of short term expectations. Trying to please stock market investors every three months hurts long term growth. By staying private longer, companies can build a stronger business and get the money they need to grow without public scrutiny.

“We started to see them [companies] hold out, stay in the private markets longer, and become more stable companies,” Voss explains.

He says that private fundraising is now much bigger, pointing out that one private company raised US$40 billion. This is much larger than the US$26 billion record for a company selling stock to the public.

Finding new ways to grow

This change of massive wealth into private markets forces investors to change their strategies. Investing only in a few big public tech companies makes it hard for large investors to spread out their money safely. Finding private companies is now a necessary way to capture major growth before a company ever reaches the stock market.

Investors want to back the next big technology winner, but figuring out what these companies are worth is incredibly difficult because their financial numbers are completely unprecedented.

“If a company is generating three to five billion in revenue and growing at 300% per year, I don’t think we’ve ever seen that before,” Voss says, questioning how traditional methods can measure this kind of explosive growth.

The cost of outdated software
While new AI companies show record breaking growth, older software businesses face a sudden crisis. Investors must examine pre-ChatGPT companies carefully to see if their products remain relevant.

“A big question with some of these investments that were made pre-ChatGPT is: Are their business models even relevant anymore?” Voss asks.

He observes that the old standard of an 85% profit is now in question. This reality forces the investment industry to abandon old ways of valuing companies.

A new way to compete

With so much money flowing into the market, competition for the best companies is fierce. Smaller investors cannot compete on money alone and must offer experience and guidance to win deals. Large funds focus only on the biggest companies to make a profit.