OpenAI, Other AI Firms Not Yet Ready for IPOs

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Microsoft, Google, and Salesforce are among the big public companies attracting the most attention for artificial intelligence (A.I.), as executives in the hot, new tech field quickly talk up their companies' A.I. capabilities to investors hungry to invest in the technology. But they are not the only ones. Which of the startups are ready for an initial public offering, and will investors care?

Nascent companies, such as OpenAI, the maker of ChapGPT, Anthropic, and Inflection, have been causing quite a stir among venture capitalists and government officials. Each of those companies has been in meetings with the White House over the development of their large language models. And startup companies such as Cohere and Hugging Face have raised millions in venture capital funding as they develop their own A.I. products.

While the market for IPOs has been strong recently, with successes from companies like Oddity Tech and Cava, it’s mostly a game of speculation to predict which A.I. companies will be ready to go public first, experts said.

However, some metrics from past IPOs can help define when a tech company could be ready to go public, said Jay R. Ritter, Cordell professor of finance at the University of Florida. Generally, tech companies will need to have about $100 million in revenue and to have been operating at least 10 years before they are ready to go public, Ritter said.

“Frequently, there is a long time span between the founding, getting venture capital funding, and then going public, but for a hot area like A.I., it wouldn’t surprise me if we see companies go public at a younger stage than is typical,” Ritter said.

Ritter’s data showed that IPOs of profitable tech companies with sales of more than $100 million had a three-year buy-and-hold return of 65.1%, compared with 36.6% returns for non-tech profitable companies in the same period.

In fact, with returns for the same three-year span of 36.7%, even IPOs of unprofitable tech companies with sales of more than $100 million did better than unprofitable non-tech IPOs. And profitable tech companies with sales of less than $100 million also did better than non-tech IPOs, earning 42.4% on three-year buy-and-hold returns.

While A.I. will likely be part of nearly every tech IPO going forward, said David Hornik, founder of Lobby Capital, it will likely be a while before pure-play A.I. companies have the economic fundamentals to go public.

“I think that we are quite early when it comes to companies in which the technological innovation is fundamentally built upon artificial intelligence,” he said.

Large language models are one A.I. technology that will likely be adopted across several other applications, and startups focused on LLMs will likely be either “vertically focused” to address targeted niche markets or have proprietary data against which to train the LLM, Hornik said. While some A.I. companies may go public, it’s more likely that bigger companies will buy startups making innovative new products.

“I am sure that there will be A.I. IPOs in our future. But IPOs will remain few and far between relative to acquisitions,” Hornik said.

Both Ritter and Hornik noted that companies will need to show more than just rapidly increasing revenue—they also must demonstrate profitability before they are likely to be taken public.

“It is no longer a market that values growth irrespective of profitability,” Hornik said. “So any company hoping to go public will not only need to be of a meaningful scale and growing rapidly but will need to demonstrate economic efficiency and a path to profitability. That is a very tall order.”

Ritter said there is no rush for companies to go public, especially as they are developing new products because that's the stage at which venture capitalists can have their most effective impact.

“There’s so much venture capital available. And there’s a lot of value added that a quality venture capital company can bring,” Ritter said. “Why spend lots of effort appeasing public markets? Once venture capitalists aren’t adding value anymore, and the company is sufficiently mature, then it could be time for an IPO.”

University of Florida, Warrington College of Business. "Biography - Jay R. Ritter."

Jay R. Ritter. “Initial Public Offerings: Technology Stock IPOs," Page 13.

Lobby Capital. David Hornik.