Wall Street and Silicon Valley Split Over AI’s Price Tag

Shifting economic forces are driving a widening divide between the financial views of Silicon Valley and Wall Street, clouding the outlook for trillions of dollars invested in AI.

Stock market angst has already caused delays for several medium-sized initial public offerings, and it is starting to cool once-red hot sentiment about Anthropic’s giant IPO, which is coming later in the year than investors expected. Two large public investors said Tuesday that they thought bankers should value Anthropic closer to $1.5 trillion, rather than the $2 trillion that some bankers have floated in early conversations. The AI firm is still likely weeks away from an official IPO roadshow.

While venture capitalists are still tripping over each other to invest at ever loftier valuations in AI startups showing any sign of traction, public market investors say they are retreating to big, safe stocks and growing skeptical about a flurry of data center companies trying to go public amid rising interest rates and high oil prices.

“Anything going public today needs to be priced right, and I don’t see it,” Samantha Lau, chief investment officer of small and mid-cap growth equities at asset management firm AllianceBernstein, referring to the IPO market overall. “The only way to open the market is to be conservative.”

Leading AI companies like OpenAI and Anthropic will likely require a steady stream of financing, even after their IPOs, to help pay for their hundreds of billions of dollars worth of data center commitments.

Anthropic, for example, had committed to agreements for at least 14.8 gigawatts of compute capacity that could cost well over $500 billion over the next decade, The Information reported earlier this month. Data from Anthropic’s draft IPO prospectus reported this week by Reuters have renewed investor attention to the size of its financial commitments and other risks it faces.

Further weighing on Anthropic’s prospects: it is facing reinvigorated competition from OpenAI, which has gained traction among business customers with its newest AI models—and which is in early talks to raise about $30 billion in a new round of pre-IPO funding that would inevitably attempt to tap some of the same investors.

‘Who’s Paying for It?’

Lau said that she is optimistic about agentic software capabilities that tech firms are demonstrating, showing new benefits to all the money invested in chips and data centers. But it isn’t clear if investment firms would see a return on their investment, especially with rising interest rates that increase companies’ borrowing costs. “The issue is, between here and the eventual utopia, who’s paying for it?” Lau added.

For now, the sober attitude from public investors has dented the aspirations for the handful of smaller tech or AI firms trying to go public this fall. Oura, the smart ring company, suddenly delayed its IPO Tuesday, the day before it was supposed to decide on a final price for the deal. Investors said the company was seeking too high a valuation, said people familiar with the matter.

SB Energy, a data center and power company owned by SoftBank that is building a giant facility in Ohio for OpenAI, also still hasn’t started marketing its offering yet nearly a month after filing its IPO paperwork. One of the ongoing disagreements between investors and SB Energy in early meetings was valuation: bankers are discussing a valuation around $60 billion but IPO investors have found that hard to stomach, for now, according to people familiar with the matter. Some investors are particularly wary over its dependence on OpenAI to generate revenue.

Similar skepticism is building among IPO investors about a slate of data center companies preparing to go public in the coming months. Those companies include Nscale, a London-based neocloud, and Switch, a large private-equity-owned data center developer that’s slated to go public. Investors are souring over the fact that these are debt-heavy companies that still require more financing to maintain growth at a time when the investors expect interest rates to keep rising.

There are more data center IPOs in the pipeline for early next year—from companies such as CyrusOne and Silver Lake-owned Vantage Data Center—all of which are expected to ask investors for billions of dollars at valuations in the many tens of billions.

Some prospective IPO investors thought companies and investment bankers were demanding excessively high prices on recent deals, and worried the companies would have traded poorly. “We needed some of this to remind bankers and [private equity] sponsors we’re not price takers,” one seasoned IPO investor said.

‘Emblematic of the Froth’

The wobbly deal outlook on Wall Street contrasts with continued heady dealmaking in venture capital. The startup behind Instinct, a viral AI consumer assistant whose competitors include Meta Platforms and OpenAI, announced Monday it had raised $1 billion at a $10 billion valuation, just a year after it was founded. Its backers include some of the most prestigious firms in the industry, such as Sequoia Capital, Benchmark and Coatue.

Privately, venture capitalists grumble about clear signs of startups stretching themselves to cash in on the boom by using loose financial metrics that don’t check out or selling significant stakes in secondary sales, far ahead of any broader IPO preparations.

Pat Grady, one of the heads of Sequoia, summed up the prevailing sentiment in a bullish presentation to the firm’s limited partners that he posted publicly last week. It had become consensus among venture capitalists that AI firms had accelerated their capabilities so quickly that they had reached “artificial general intelligence,” he said, referring to a much-debated threshold in which AI matches or surpasses human capability at all tasks.

At the same time, “valuations are totally insane,” with startups raising money at significantly higher valuations rapidly after raising one round of financing, he said, adding: “It’s emblematic of the froth.”

The vibe shift between tech investors on Sand Hill Road and on Wall Street comes down to differences in focus, said Evan Skorpen, the public portfolio manager at Lead Edge Capital. “Venture managers often spend their time thinking: ‘what could this company be worth in an upside case?’’ he said. “If that’s your mental state there is plenty of exuberant data points in the market currently to get excited about.”

He added: “Public investors can’t just think about what can go right because we need to own stocks day to day. Public investors think a lot about what can go wrong.”

Just a few months ago, both private and public investors seemed to walk away from the largest IPO ever feeling good. Since SpaceX raised nearly $86 billion in June in the largest IPO ever, its stock price is up about 10%, valuing it around $2 trillion and beating the overall stock market. That allowed investors who bought into the deal to book solid gains, and delivered enormous returns for earlier investors like Founders Fund, Valor Equity Partners and Sequoia, allowing them to invest more money into the AI boom.

Anthropic could still take advantage from similar dynamics that uniquely benefit large IPOs. Big mutual funds already bought significant stock privately in the company, at lower prices, potentially making them more forgiving of higher prices at IPO time. Tech giants like Nvidia and existing investors like Alphabet and Amazon could put up more cash. And individual investors could give Anthropic’s IPO a boost because of its high profile.

The combination of gains from SpaceX and the anticipation of Anthropic’s public debut may cause public investors to reject smaller deals, out of fear it could dent their public funds’ performances late in the year, said Ashley MacNeill, who runs equity capital markets strategy for Vista Equity Partners.

“The robust valuations you’re seeing in the private market don’t seem to be fully carrying over into the public markets,” she said. “We’ve had these moments in time in history before. We’ll have them again. It’s just very acute right now because you have these jumbo IPOs.”