21 June 2023
If the impact of Ai as a disruptive technology could be represented in a curve alongside other technologies, then the annual Gartner hype cycle could be the most appropriate. Ai has been in active development for years and is now said to be on the slope of enlightenment on the hype cycle. This means a higher rate of adoption and numerous high-potential AI companies going public term through IPOs.
Created by Gartner, the hype cycle identifies and represents the stages a disruptive or impactful technology goes through before it becomes mainstream. The five stages of the Gartner hype cycle are the innovation trigger, the peak of inflated expectation, the trough of disillusionment, the slope of enlightenment, and the plateau of productivity.
Being on the slope of enlightenment means Ai’s potential is now clearly understood, and many AI companies, experts, and consumers are realizing its practical applications. As evident by events in recent days, AI is taking center stage in every conversation, thanks mainly to Open Ai’s release of its generative Ai GPT models for mainstream use.
In the last few years, we have seen many applications being developed across industries that leverage the power of AI in its various forms. From generative text-based AI applications to voice assistants and industrial production optimization systems to digital art, the applications are endless and incredibly disruptive where they are correctly implemented.
To cement the place of AI as a disruptive and potentially lucrative technology, we have seen some of the biggest players in tech, like Microsoft and Google scrambling to earn their place in the industry. Microsoft beat the rest to the punch by integrating GPT into Bing, Office 363, and Co-Pilot. However, Google recently joined the fray with its product, Google Bard.
“These AI tools will help us be more productive, healthier), smarter (students using ChatGPT to learn), and more entertained.” – Sam Altman, CEO of OpenAI.
“Artificial intelligence will have a more profound impact on humanity than fire, electricity, and the internet.” – Sundar Pichai, the CEO -Alphabet.
Writing on his blog Gates Notes, Microsoft founder Bill Gates had this to say about Ai and its future, “Artificial intelligence is as revolutionary as mobile phones and the Internet. The article’s title, “The Age of Ai has begun,” is even more telling.
Many experts and end users agree that Ai will significantly enhance our ability to develop and deploy solutions in science, art, technology, culture, politics, and every other aspect that shapes the world. By design, today’s Ai technologies are designed to augment human intelligence leading to better outcomes in any problem-solving activity we are involved.
For example, several AI companies are involved in healthcare R&D using Ai as one of the problem identification and problem identification tools. Such companies use sophisticated AI algorithms and training models to analyze large volumes of medical data, including patient records, clinical trial results, and genomic data. The breakthroughs from these endeavors have led to better treatment options, the discovery of new drug candidates, and so much more.
More importantly, Ai technology developed by innovative companies can be paired with human experts to augment or complement their intelligence. This greatly enhances their problem-solving and decision-making abilities. For instance, clinicians in cancer care use Ai tools in medical fields to help with diagnosis, treatment strategy, and patient care.
Some of the most successful Ai companies that have gone public with IPOs in recent years and those who plan to have developed Ai solutions that greatly enhance human productivity. Some of them are designed to accelerate growth in the sectors they are used to by solving complex problems quickly. For instance, some Ai tools simplify solving complex production design problems- something that could have taken expert days and weeks to do.
There is no doubt, at least from Ai insiders and enthusiasts, that AI-powered tools developed by innovative well-funded companies will profoundly affect many things. They will positively impact productivity, growth, industry creation, economic development, and diversification. Ai will power this and the subsequent decades of scientific and technological breakthroughs.
The current hype around artificial intelligence does not, in any way, represent its true developmental trajectory adoptions across industries. Many companies have been using sophisticated Ai implementations in various products for years. For instance, Google, Amazon, Microsoft, and Apple have given us a taste of Ai in the real world through their voice assistant products.
The continuous integration of AI and its cousins ML and DL has been happening for the past decade, and there is no doubt about its potential, given its successes to date. It is expected that Ai will continue to permeate our lives for the foreseeable future. It will collaborate with scientists and other critical experts like artists and doctors, a patient and knowledgeable tutor, and much more.
Going public through an IPO is a huge and potentially transformative undertaking, even for Ai companies with a clear competitive advantage and healthy balance. As a pre-IPO entity, you should ask yourself these three fundamental questions before you make any decisions about going public:
We can attempt to answer these three questions by exploring what an IPO means for Ai companies in the current market and the processes involved.
Let’s start with the basics; what is an IPO? IPO stands for Initial Public Offering in full and refers to when a privately held transitions into a publicly traded company through an IPO event. It is one of the most significant events in any company as it has enormous implications on the ownership structure of a company, its financial setup, accounting and disclosures, brand visibility, liquidity, and so much more.
A company going public through an IPO means it is ready to offer its shares or equity for sale on public markets where it will be listed. For instance, AI company X in India can decide to go public through an IPO by offering its shares for the first time on the National Stock Exchange of India (NSE). However, the IPO process is much more elaborate than just offering shares on a public market.
To issue an IPO, the company in question must hire an underwriter, usually an investment bank that is authorized and competent with IPO transactions. The underwriter assumes various roles in the IPO process, but their primary tasks are determining the number of shares to be sold and the price per share, including the IPO and issue prices.
The contracted investment bank manages the entire IPO process for the company going public, including making the necessary filings with the relevant authorities, underwriting the IPO, marketing it to investors, and managing the handover of shares to investors post-IPO.
When an IPO is complete, the issuing company’s shares are in the hands of the public stock exchange and can be traded freely. However, companies can retain a certain percentage of the equity to maintain control over the company and for other purposes, such as employee compensation.
Companies go public through IPO primarily to get access to capital and other resources for expansion, offsetting debt, providing liquidity to early investors and pre-IPO shareholders, etc. By floating or offering their shares on public markets, companies can access funds from a more extensive and diverse pool of investors.
However, access to capital is not the only benefit of an IPO. Some of the other direct benefits of an IPO to those involved include:
Brand visibility and credibility – Companies that go through a successful IPO to become publicly listed entities become more visible and recognizable to the outside world. The increased brand awareness can significantly impact the company’s credibility and attract valuable customers and other stakeholders like strategic partners, suppliers, and sort-after talent.
Acquired currency– A publicly traded company’s market-based valuation is a strong currency or bargaining chip that can be used for mergers, acquisitions, and debt negotiation with private financiers and suppliers.
It enhances corporate governance– Going public attracts higher scrutiny from regulators, external shareholders, and other stakeholders. This is usually a blessing in disguise for most companies as it forces a culture of integrity, accountability, compliance, and good corporate governance practices.
Opportunity for future Capital Injections- Going public means a company is no longer tied to prohibitive private fundraising options such as VC funding. It allows them easy access to more funding options, such as debt and follow-on offerings where needed.
Benchmarking and valuation– A company submits its valuation to free market forces in the stock exchange by going public through an IPO. While this might sound scary initially, it is a step forward as its market-driven valuation serves as a benchmark for its valuation. Of course, there are instances where market valuation can be a curse, especially when unfavorable investor sentiment is not connected to the company’s performance.
Liquidity for Pre-IPO shareholders– Going public gives pre-IPO investors like VC firms and early employees a chance to monetize or cash in on their holdings, thus benefiting from the company’s success. Most VC firms look forward to a company’s IPO event because it allows them to free up cash for other ventures or benefit from their investment.
IPOs are a significant milestone for companies as they offer a coveted opportunity to grow and expand while increasing their visibility and credibility. For early investors and employees, it allows them to monetize their equity and realize gains from the company’s success. However, an IPO must be successful for all these gains to be realized, so it must be done at the right time and managed well.
Ai company IPOs follow the typical IPO process other companies follow when accessing public markets. Typically, it involves identifying a window of opportunity to go public and finding an underwriter who can manage a successful IPO, given the company’s standing.
However, you need to be aware of two unique aspects of Ai company IPOs if you are involved in the IPO process. These are:
While Ai companies scramble to initiate an IPO due to favorable market conditions, there is a generally cautionary preference for deliberate underpricing among established underwriters. Deliberate IPO underpricing is when underwriters give a conservatively low listing price when floating an IPO. They do this to attract investors in the early stages of the IPO and protect themselves from regulatory pitfalls that come with massively overpriced IPOs.
It may seem counterproductive, given that companies generally want to maximize capital gained from an IPO, but deliberate pricing in IPOs is standard. Studies have shown that a majority of IPOs are underpriced by eighteen to forty-seven percent. Underpricing is becoming especially prevalent for companies dealing with emerging technologies like Ai, ML, Cloud computing, and digital goods.
It is safer for Ai companies going public in the current market to maintain the conservative pricing model in deliberate underpricing that has proven successful for years. With the hype around Ai technology, getting carried away and entering the market with an unrealistically high listing price is easy. Such a mistake would have a devastating effect on the performance of the IPO in the critical early stages, which is not something any company founder wants to deal with when involved in this process.
Naturally, Ai underwriters have to put a lot more effort and resources to generate interest for Ai IPOs than other sectors. Ai is a relatively new concept or product in most industries; most investors do not understand its usefulness and economic potential. As such, it is vital for Ai companies going public to be well-informed enough to initiate the process at the right time.
Like most companies dealing with emerging technologies, Ai companies going public need to factor in the profile of target stock markets and inherent market perception for best IPO outcomes. Some markets are generally more inclined toward tech stocks, whereas Ai companies have the best chance of attracting enough interest to make the IPO successful.
For instance, big offshore Ai companies may choose to list their stock in US stock exchanges where tech stocks tend to perform well, and investors are better informed about Ai’s value and potential. Good examples include India’s Wipro, Sify Technologies, Infosys, and many others listed on the New York Exchange.
Most emerging Ai technologies are meant to be used in heavily regulated and closely monitored industries like finance, healthcare, and agricultural production. As such, Ai companies looking to list on public markets through an IPO must navigate a complex regulatory environment beyond the confines of the Securities Exchange Commission or its equivalents overseas before becoming a public entity.
Ai companies must ensure they address data privacy issues, compliance with industry-specific regulations, transparency, ethical standards, and so forth before they list. Additionally, compliance becomes more critical when they go public and face more scrutiny. It’s much easier for Ai companies to face legal and reputational challenges when they go public with an IPO.
Ai companies continue to face serious IP protection challenges as they go public primarily because Ai models and algorithms are not easy to protect through normal patenting processes. It, therefore, takes a considerable effort for these companies to strategize on how to protect their IP rights as they go public and have to make disclosures along the way.
Another challenge Ai companies going public face is the investor expectations attached to the IPO event itself. This investor group consists of private VC firms, employees holding pre-IPO stock options, and other entities with a pre-IPO equity stake in the company. Sometimes, these interested parties may pressure parties involved in the IPO process. Therefore, the company must provide a realistic roadmap and ensure that everyone involved is well-informed about the process.
To successfully navigate the challenges that surface during an IPO process, Ai companies should ensure careful planning, effective communication, and strategic decision-making. The whole IPO process and eventual listing on the stock exchange should be designed to achieve long-term sustainability.
IPOs for Ai companies are pretty similar to traditional IPOs in terms of process, design, goals, and stakeholders. However, specific factors differentiate typical Ai company IPOs from traditional IPOs.
These factors are associated with Ai companies’ nature and other considerations to ensure the IPO’s goals are met. Here are some of the factors
Today’s Ai companies are expected to be at the forefront of technological innovation as they leverage the latest artificial intelligence, machine learning, and data learning developments. From these technologies, they are expected to design disruptive products that are unique and financially viable. Investors looking to buy into Ai IPOs are therefore looking at the potential of these companies as disruptors of industries which naturally means that they have high expectations.
Ai companies must be ready to comply with ever-evolving regulatory challenges even during their IPO process. As part of the IPO process, these companies are expected to explain their compliance strategies and how they plan to mitigate the risks associated with future regulatory shifts touching on their technology. For instance, what happens if regulators introduce laws restricting the use of end-user data to train and refine future models?
Ai companies rely on their IP to gain sustainable competitive advantage and attract investors in the IPO. As such, these companies are expected to be able to highlight the uniqueness of their AI technologies or products to prospective investors and how they will protect their intellectual property post-IPO. This may include describing the nature of their trade secrets, patented Ai models, practical implementations with algorithms, and other aspects of their IP without revealing vital secrets.
The ability to attract and retain the best talent in the Ai industry is one of the factors in the Ai company IPO process. Given the competition for these experts in the current job market, skilled professionals are an asset to Ai companies. During the IPO process, these companies can highlight their talent pool and demonstrate an ability to attract and retain the best talent in the industry to gain investor confidence.
Many Ai companies going public tend to be in some stage of commercialization and may not have a real foothold in the market or face competition. That said, they are still expected to demonstrate that they can achieve a desirable financial performance and scalability level to investors. They should be able to show their ability to become profitable entities through their stated customer acquisition strategies, revenue generation, and cost management strategy.
Even though the Ai industry is still in its infancy and there is little competition among pioneering Ai entities, companies going public with IPOs must prove to investors that they can position themselves to gain sustainable competitive advantage. They can do this by highlighting their differentiation strategies, diversification plans, strategic partnerships, positioning, value propositions, and their ability to take advantage of opportunities in the Ai industry.
Several factors, including market trends, competition, and regulatory developments, influence an AI company’s future outlook and the broader AI industry. Here are some insights to consider:
The AI industry is expected to snowball in the coming years. AI technologies are being adopted across various sectors, including healthcare, finance, retail, manufacturing, and more.
Key market trends include increased investment in AI research and development, the proliferation of AI-powered applications and services, the rise of edge computing and IoT, and the integration of AI with other transformative technologies like blockchain and 5G.
The AI industry is highly competitive, with established tech giants and startups vying for market share. Established companies like Google, Microsoft, Amazon, and IBM have invested heavily in AI research and development, while startups continue to emerge with innovative AI solutions.
The competition drives continuous advancements in AI technology and pushes companies to differentiate themselves through unique algorithms, domain expertise, data quality, and user experience.
Ethical considerations and regulatory frameworks are gaining prominence in the AI industry. Concerns around data privacy, bias, and fairness in AI systems have led to increased scrutiny and the need for responsible AI practices.
Regulatory bodies and governments are working to develop guidelines and regulations for AI adoption to ensure ethical use and protect consumer rights. Compliance with evolving regulations will be crucial for AI companies to maintain trust, avoid legal risks, and mitigate potential reputational damage.
Data governance and privacy will remain critical factors in the AI industry. Companies must navigate complex data protection regulations and ensure proper handling, storage, and data usage.
Building robust data governance frameworks, implementing privacy-by-design principles, and maintaining transparency in data practices will be essential for AI companies to gain and maintain consumer trust.
AI technology itself is evolving rapidly, opening up new opportunities and challenges. Advancements in deep learning, natural language processing, computer vision, and reinforcement learning are expanding the capabilities of AI systems. Techniques like transfer learning, federated learning, and edge AI are gaining prominence, enabling AI to be more versatile, efficient, and accessible across different devices and environments.
While the future of the AI industry holds immense opportunities, it also presents challenges. AI companies that stay at the forefront of technological advancements, prioritize ethical practices, adapt to regulatory changes, and forge strategic partnerships will likely thrive in this dynamic landscape.
The ability to navigate market trends, differentiate from competitors, and address societal concerns will be crucial for sustained growth and success in the AI industry.
AI company IPOs have become increasingly important in the broader AI industry. They provide opportunities for AI companies to access capital, accelerate growth, attract partnerships and acquisitions, and enhance their market visibility and credibility. AI IPOs present opportunities for investors to participate in the growth of innovative AI companies and contribute to the development of the AI ecosystem.