CITYPERC Seminar - David Kampmann - When Private Became King

The established view on the concentration of corporate power in Tech holds that new start-up entrants become acquired by or subordinated to Big Tech monopolies. Yet, with the entry of AI newcomer firms such as OpenAI and X.AI we observe something different: these privately-held start-up firms raised unparalleled investments from venture capital (VC) firms and other investors who anticipate that generative AI chatbots could be turned into highly profitable monopoly platforms rendering Big Tech’s obsolete and paving the way for artificial general intelligence (AGI). Whether or not this turns out to be true, it points towards changing dynamics of competition in US Tech. This paper argues that the key to understanding these dynamics lies in the transformative changes in US start-up finance after the 2008 global financial crisis. With the emergence and rapid expansion of an opaque and unregulated parallel market for private start-up finance, the model of VC-backed start-ups changed drastically–compared to the dotcom era when the IPO was the main objective of VCs and founders–towards staying privately-held and under the control of founders and insiders for as long as possible. Drawing on secondary literature and financial data, this paper traces the emergence of growth equity, venture debt, and secondary markets for start-up equity and uses OpenAI and X.AI as case studies to demonstrate how these markets enabled the highest valued privately-held AI firms to compete with cash rich yet publicly-listed Big Tech by continuously attracting outside investments to cover massive losses while equity valuations keep increasing–the logic of venture burn. The paper points towards a broader shift from public to private financial markets where the winning tech firms with hectobillion-dollar-equity valuations may reject IPOs and stay privately-held while founders seek to retain total corporate control over AGI technologies.

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