Editor's note: In 2012, Facebook paid $1 billion for a photo app with no revenue and, by most accounts, no real business model. Wall Street called it the worst deal of the year. But as Luke Lango of our corporate affiliate InvestorPlace explains, the people who profited most once the photo app took off weren't Facebook shareholders. That unique setup is unfolding as the AI boom enters its next phase...
In May 2023, Spark Capital made its biggest investment ever...
The venture-capital firm wrote a $75 million check to help fund Anthropic – a private AI startup that had almost no revenue... and no Wall Street coverage.
Three years later, Spark's stake is estimated to be worth $7 billion.
One investment. Nearly a 100-fold return.
The deal sparked the current AI investment cycle. Investors like Spark provided the capital that helped companies like Anthropic grow into some of the most valuable businesses in the world.
But that cycle is already changing.
The companies that were startups just a few years ago are fast becoming giants themselves: Anthropic, OpenAI, and others.
Along with Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (META), and Nvidia (NVDA), these companies are raising – and spending – tons of capital.
It's a race to build "the next great computing platform." But these companies will eventually realize they can't invent everything themselves. No company – not even the AI labs valued at nearly $1 trillion – can hire every brilliant engineer or invent every breakthrough first.
That's a sign that we're entering the next phase of the AI boom. And the companies that these AI giants find too valuable will provide the next generation of opportunities for early investors...
Follow the Money
One of the first rules I learned as an investor is that money leaves clues. When hundreds of billions of dollars begin flowing in the same direction, I pay attention.
During the first phase of the AI boom, money was flowing into infrastructure – chips, power, and data centers. I still believe many of those companies have room to run.
But the next phase could look very different.
Money is no longer just flowing into Nvidia. It's flowing into the entire AI ecosystem.
Amazon alone expects to spend roughly $200 billion on AI projects this year. Microsoft and Alphabet are each planning about $190 billion. Meta could spend another $135 billion.
That's roughly $700 billion in a single year, or about $2 billion every single day.
Meanwhile, Anthropic's latest funding valued the company at around $965 billion. And OpenAI is said to be worth roughly $852 billion.
But even with all that money, these companies can't invent everything themselves. Call it Silicon Valley's dirty little secret: It's often faster to buy innovation than build it yourself.
The companies leading AI believe they're building the next computing platform. When the stakes get that high, companies stop asking, "Can we build this?" and start asking, "Who already has?"
For investors, answering that one question could make the difference between simply participating in the AI revolution... and getting in before the rest of Wall Street catches on.
We've seen this movie before.
In 2012, Facebook paid $1 billion for Instagram. At the time, it looked ridiculous.
Most people thought the company had wildly overpaid for a photo-sharing app with just 13 employees and no revenue.
Turns out, it was the bargain of the century. Instagram has since become one of Meta's most valuable businesses, generating $67 billion in ad revenue last year.
But the biggest winners weren't the people who bought Facebook stock after the Instagram deal. They were the private investors who backed Instagram before Facebook came calling.
And this pattern continued throughout the past few tech booms...
Google bought Android before smartphones became universal... then YouTube before online video dominated media.
Microsoft acquired GitHub as software development became increasingly collaborative and cloud-based.
Notice the pattern. These companies weren't acquired because the buyers were running out of money. They were acquired because the buyers were running out of time.
I think AI is setting up a similar dynamic, only on a much bigger scale.
The Ticker Is No Longer the Starting Line
For decades, most investors assumed the stock market was where great companies began. Increasingly, it's becoming where they finish their first chapter.
Consider SpaceX (SPCX)...
By the time it went public, SpaceX had already spent years building rockets, launching satellites, signing government contracts, and creating value.
Within weeks of the company's IPO, the stock slid far below its high of more than $200 – and below the original $135 offer price.
If you got in on Day 1, you were part of the largest IPO in history. But the momentous occasion didn't prevent you from getting caught in a painful drawdown.
Investors who entered years earlier were playing a different game entirely. They bought in at private valuations far below the one public investors were offered.
And that entry price can drastically change how two investors feel about the same company.
History tells us that during technological revolutions, the headlines almost always focus on the giants... But the biggest fortunes are often created one or two layers beneath them.
That's why I've recently started asking: Which companies will become so important that an AI giant decides it cannot afford to compete against them?
Just like Anthropic transformed Spark in a single deal, history suggests these smaller, established companies will lead the way as the next phase of the AI boom unfolds.
Sincerely,
Luke Lango
Editor's note: Every tech revolution creates a new generation of companies solving problems the giants can't figure out alone. That's why Luke has spent the past year building a framework to uncover the companies today's AI giants can't afford to ignore.
According to Luke, the real opportunity today is in finding these off-market investments that Silicon Valley is pouring money into before they go public. And during his free AI Megadeal Event next Thursday, Luke will explain the framework he uses to spot tomorrow's leaders – and share one opportunity he believes could be among the biggest winners of AI's next chapter.
Further Reading
A small group of tech giants has driven most of the AI boom so far. That kind of narrow leadership can create risk if momentum fades. Yet, one overlooked corner of the market has created some of the biggest winners... while avoiding the market hype.
"The value of a company isn't based on last quarter's sales," writes Dave Lashmet. Quarterly earnings only tell part of the story. In the technology sector, the biggest investments often don't pay off for years – creating opportunities that many investors fail to recognize.