AI and the IPO market: Demand is there but product is lacking

Published Mon, Jun 10 20248:50 AM EDT

This week, Tempus AI , a healthcare diagnostics company that uses AI to interpret diagnostic testing to help physicians provide more accurate treatment for their patients, is slated to go public on the Nasdaq. It's one of the few AI-themed IPOs to emerge in 2024, although investors are eager for more. But there is very little on the horizon: AI companies are still able to raise money in the private markets, and many are still fearful of valuation haircuts in the public markets that have prevented other tech/software companies from going public. Tempus AI = AI in healthcare Tempus AI is seeking to sell 11 million shares at $35-$37 in its IPO and is slated to begin trading this Friday. At the midpoint, it would raise $400 million with a market value of $5.9 billion, according to Pitchbook. The company said in its filing, "We endeavor to unlock the true power of precision medicine by creating Intelligent Diagnostics through the practical application of artificial intelligence, or AI, in healthcare. Intelligent Diagnostics use AI, including generative AI, to make laboratory tests more accurate, tailored, and personal. We make tests intelligent by connecting laboratory results to a patient's own clinical data, thereby personalizing the results." The company believes that AI can help guide therapy selection and treatment decisions, in conjunction with the patient's doctor. It generated total revenues of $531.8 million in 2023 and a net loss of $214.1 million. AI IPOs: few and far between While AI is again the big investment theme of 2024, AI-themed IPOs have been few and far between. Astera Labs went public in March and is up 73% from its initial price. Reddit , a social news aggregation site, has some AI aspects to it, and is up 77% since its March debut. Other recent software IPOs have had a more mixed performance. Ibotta , a digital advertising platform that went public in April, is down 11% from its initial price after providing disappointing guidance. Data security firm Rubrik , which also went public in April, is up 3% from its initial price. But the appetite for AI IPOs is large, and investors are scanning for new investments. A big problem: many AI firms are having no trouble raising money in the private markets. "The most in-demand companies still have no problem raising money privately," Matt Kennedy from Renaissance Capital told me. Take oft-mentioned IPO candidate DataBricks , a cloud-based platform that unifies and simplifies data systems. It raised $684 million in its latest funding round last November, and has a current valuation of $43 billion, according to Pitchbook. CoreWeave , a cloud AI startup backed by Nvidia and private equity firms, is also reportedly exploring an IPO for 2025. It raised $1.1 billion last month in a new funding round. Scale.ai recently closed a $1 billion financing round that valued the company at nearly $14 billion. The company transforms raw data into high-quality training data for AI applications. Cerebras Systems , a chipmaking startup that builds computer systems for deep learning applications, has not yet filed but did hire Citigroup in April to explore a 2024 IPO. Valuation haircuts still an issue Finally there is the issue of "haircuts." Many tech companies raised money during the heady days of the pandemic and are now facing pressure to lower the valuations in order to attract investors in the public markets. That appears to be the case for Tempus AI, said Howe Ng at Forge Global Holdings. "They have been raising at a flat valuation for the last few rounds," Ng told me. "It makes sense for them to try their hand at the public market, versus other more pure play AI companies like Anthropic and Scale AI, which have been raising at higher step-ups in the private market. Looks like their target IPO valuation is also at a discount to their last funding round." Anthropic, which remains private, has successfully raised money at higher valuation rounds, including a $4-billion raise in March that valued the company at $18.4 billion, according to Pitchbook. Although the anticipated flood of AI IPOs has not yet materialized, Matt Kennedy is confident more are coming. "A lot of AI companies are staying private while they scale up, so this might just be the tip of the iceberg, before AI really hits public markets" next year through 2027, he told me.