Tomorrow’s marvels, today

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. 

In 1962, the science-fiction writer Arthur C Clarke wrote: “Any sufficiently advanced technology is indistinguishable from magic.” Whether it is reusable rockets being plucked from the air, or AI showing the kind of thinking that was historically the preserve of the human mind, the last few years have provided their share of these magical experiences.

The usual accompanying cliche would be that we live in ‘unprecedented times’. It is true that we live at the apex of human and technological capability, but it is also true that every moment in history was itself an apex.

When Clarke penned this aphorism, a microwave oven seemed to possess the aura of magic. Just as what passed for miraculous in 1962 has faded to mundanity, so the magic of our own time will become ordinary.

There is, however, one aspect of this ‘magic’ that is unprecedented: most consumers first encounter it while the companies responsible are still private. Innovation has historically occurred when companies were still private, but those businesses often became public relatively early in their journeys, and the vast majority of customers encountered these wondrous experiences only after the initial public offerings (IPOs).

Amazon’s annual report from 1997, the year it went public, boasts about cumulatively serving 1.5 million customers – 0.5 per cent of the roughly 300 million customers it currently serves annually. When Steve Jobs pulled an iPhone out of his pocket in 2007, Apple had been public for 27 years.

Will we see a trillion-dollar IPO? Almost certainly 

When we began investing in private growth companies in 2012, we had a tentative hypothesis that a structural shift was underway that would lead to companies remaining private for longer. The last 14 years have shown that we were right, but even we are surprised by how far it has gone.

This trend has given rise to the mega-cap private company. In 2012, the five largest public companies in the world had a combined market cap of $1.6tn. Today, the five largest private companies (SpaceX, ByteDance, Anthropic, Databricks and OpenAI) are worth a total of about $3tn. 

We own all but OpenAI, which has been great for returns. But it has also led to a refrain from our clients: “When, if ever, will these companies IPO?”

To answer this question, we need to start by asking why companies raise capital in the public markets. Or to phrase it a little differently, what is the product market fit of the public markets for companies?

Historically, the public markets were the place to go if companies needed to raise substantial capital for investment. In return for capital, companies would create and sell fresh equity to public investors – so-called ‘primary capital’. If you needed large amounts of capital to invest, you needed the public markets.

Private markets are now the main provider of primary capital for investment in high-growth businesses. Every single dollar of the approximately $125bn in primary capital raised by the private mega-caps has been funded by private markets.

A different dynamic has led to the rise of the private mega-caps – the satisfying of secondary capital demands.

Asset managers, their clients and employees’ remuneration plans still needed the secondary-market liquidity that only public markets could offer. But this too has started to change. In the last few years, we have seen companies organise large secondary liquidity events while still private.

SpaceX now has a fairly predictable cadence of twice-yearly tender offers (and could achieve a valuation of well over $1tn if it floats later this year, as media reports suggest). ByteDance regularly uses its incredible free cash flow to buy back its own shares. And in 2023-24, Databricks and Stripe together raised more secondary market capital than the entire US tech IPO market. In short, the public markets have largely lost their product-market fit for primary equity, and their monopoly grip on the secondary markets is loosening as well.

However, all is not lost for the public markets, or the hope that these mega-cap private companies will eventually IPO. Private markets are deeper than ever. But the amount of secondary liquidity required for a multi-hundred-billion-dollar business can still only be provided by the public markets.

What is unprecedented is the size of these potential IPOs and the maturity of the businesses behind them. Alibaba raised $25bn via its 2014 listing, which remains the largest tech IPO in history. Were SpaceX to list 10 per cent of the company at today’s valuation, it would put that in the shade. Capital markets are in uncharted waters.

If the scale of these IPOs is new, it is matched only by the scale and quality of the businesses that sit behind them. ByteDance and Meta best illuminate this. In the year before Meta – or Facebook as it was – raised $16bn in its 2012 IPO, it had earned approximately $4bn in revenue and $1bn in net income.

ByteDance is already 40 to 50 times larger in revenue and profit. If, as a fun, though improbable, thought experiment, we applied the multiple to earnings that Facebook achieved in 2012 to ByteDance today, it would yield a valuation of more than $4tn. More realistically, ByteDance would need a valuation of 20 to 25 times its annual earnings to be worth $1tn in a 2026 IPO.

AI creates growth, but not all growth is AI

After the ‘IPO, when?’ question, the second most common line of inquiry from our clients is about valuations and those two letters: A and I. Are we in an AI bubble?

The answer to this question entirely depends on where you believe AI sits on the Gartner Hype Cycle.

We could point to the previous waves of AI promise and the power of today’s models to make a convincing case for the ‘peak of inflated expectations’ being a thing of the last decade, and the ‘slope of enlightenment’ being the current locus of our journey. However, if satisfaction equals performance minus expectations, then the performance must be exceptionally high for AI to offset the weight of expectations.

Nobody could reasonably argue that AI valuations are low based on today’s financial performance, as opposed to future potential. We believe there will be breakout companies that will come to more than justify their current valuation – we believe we own a few of them – but there will be many that don’t.

More than ever, the heat around AI calls for judicious stock picking. This requires bottom-up fundamental analysis of the drivers of long-run financial success: compounding competitive advantage, aligned and intrinsically motivated management, and an effective business culture.

It also demands a focus on exceptional business models that deliver high returns on equity at scale. Investors need to remember that we are not investing in products, but in businesses.

We would also be wise to recall the insightful metaphor, invented by Benjamin Graham and popularised by Warren Buffett: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” At a time when the market is clearly voting in favour of AI, we must dogmatically hone our weighing machine. 

Fortunately for our clients and us, we are not AI investors, nor even tech investors, but growth investors. The AI question is important, but we forget other kinds of businesses at our peril. As capital is sucked into the great vortex of AI, it has to be withdrawn from other areas. Some of our fellow growth equity investors have told us that they are dedicating 100 per cent of their time to AI. Statements like this cause the ears of the contrarian imp inside us to prick up. Whether the promise of AI holds true or not, surely it cannot be the case that business model innovation will grind to a halt elsewhere?

Where the growth is: Baillie Gifford invests in private companies across the globe on behalf of clients

Indeed, some of the most exciting business models we are finding today are in sectors and geographies where no one is looking – businesses such as Toss in South Korea, which is a financial super app, or Bending Spoons in Italy, which acquires and drastically improves consumer application companies.

To be clear, there is no sacrifice in growth rates or business quality in these kinds of companies – quite the opposite. They are true world-class growth businesses, with multiples at a fraction of those companies occupying the centre of the AI supernova.

To put it slightly differently, there will always be parts of our, indeed any, investment universe that have relative heat. AI is the lead contender in ours right now. In the past, it has been social media, consumer internet, the metaverse and crypto.

We seek to harness the upside from the undoubted progress in AI and the business models it enables through judicious stock picking in that market. But we are also using our broad opportunity set across industries and geographies to capture growth wherever it arises.

We are not a single technology hypothesis strategy. We are globalists and generalists by design, not accident. And a broad opportunity set is the antidote to heat in subsectors.

So, what next?

After clients have asked us about AI and valuations, the conversation usually turns to where we will invest over the coming 12 months. What the questioner wants to hear is company names. There are dozens of companies in our pipeline, but I’m reticent about identifying any until we have built enough conviction to commit. Likewise, I avoid discussing sectors because of our bottom-up focus, seeking out exceptional companies based on their individual merit.

But what I can share with confidence is that we will scour the globe for the very best growth-stage companies capable of delivering outsized investment returns.

One of the most striking experiences of 2025 for me was a trip to China. The calibre of the businesses I met blew me away. I encountered robotics companies that were doing what US companies had been trying and failing to do at scale for years.

Many of the firms I met were already profitable, growing faster than their western peers and with higher margins. If that wasn’t enough to whet the appetite, the multiples they were raising at were significantly lower, too. We must keep geopolitical uncertainty and prices in mind when we think about China. But at a time when most of our peers are running away from the country, we continue to give its businesses the attention they deserve.

Experience has taught us that the best opportunities often come from unexpected places. Who would have guessed in 2022 that one of our best-performing investments across our entire platform in 2025 would be a Milan-based technology platform – Bending Spoons. Or would we have guessed that a Lithuanian-founded second-hand ecommerce platform – Vinted – would be one of the most exciting companies in our portfolio?

“OK,” says the questioner, “I hear you. What about sectors?” Again, I know I’m going to disappoint. I trot out some well-trodden arguments about the dangers of thematic investing and the virtues of the bottom-up investment selection. But I can tell from the blank looks across the table that I’m losing my audience. “Well,” they reasonably ask, “what the hell are you going to invest in?” Now is my chance, I think, to land my meta-level answer, and so I wind up delivering something along the lines of the following.

Where do we find tomorrow’s winners?

We do not know which companies, or which sectors we will invest in over the next 12 months. Our search for the very best growth-stage companies capable of delivering outsized investment returns remains. Broadly speaking, we think these companies can be found in two places.

Some thrive in plain sight. Arguably, we don’t have any special ability to discover these companies. You have all heard of them, just as we have. But we do have a special ability to access them. The marriage of our large public investment business, with our presence in the high-growth private market for as long as it has existed, gives us privileged access to these businesses and their management teams. Anyone can point to them, but we can invest in them. Examples in our portfolios range from growth stalwarts, including Stripe, Databricks and SpaceX, to the next generation of growth champions, such as Anthropic, Anduril and Rippling. 

These companies may feel optically expensive. Multiples are high, and so our investment work needs to focus on the magnitude and durability of growth and profits. To put it slightly differently, we will get crushed on the multiple, so to make a lot of money, the growth needs to not only offset this but be so staggering that it drives outsized returns in the face of multiple compression.

When our investment process is properly applied, what can feel painfully expensive with foresight can come to look cheap in hindsight. Stripe felt nosebleed-expensive when we invested in 2019. But the company has grown revenues by more than 500 per cent since. Meaning that despite multiple compression, it is shaping up to be a real winner for our clients.

The second place we find these world-class growth companies is beneath the radar. You probably won’t have heard of these when we first invest in them. Part of our edge here is our ability to discover them. They typically operate outside traditional venture capital (VC) networks, so few investors have cultivated relationships with them.

Often, these companies have bootstrapped themselves, giving them a keen eye on the true cost of capital and making them exceptional capital allocators. Often, the valuations are extremely undemanding. Although we would never assume it in an upside scenario, we are far more likely to see multiple expansions than compressions in these investments. Where we must focus our diligence is on execution. By virtue of being lesser-known quantities and often outside traditional ecosystems, there is less that can be assumed about these companies’ ability to execute.

Examples from our portfolio that were little known when we added them but are now well-known household names include Wise, Tempus and Wayve. More recent additions, including Bending Spoons, Tekever, Avanci and Mottu, may only just be coming onto your radar.

We didn’t have too many questions about whether the combination of Elon Musk and Gwynne Shotwell could execute at SpaceX, or the Collison brothers could drive Stripe forward. But when we began getting to know Luca Ferrari at Bending Spoons and Kasim Alfalahi at Avanci, there was no wisdom of the crowd to draw upon, because the investment crowd was unfamiliar with them. That means spending more time with them and setting the bar for conviction in leaders very high. But when we find them, I would argue that those under the radar founders are among the very best leaders.

“Magic is just science we don’t understand yet”

We see no shortage of magic happening in our investable universe, both on and off the beaten path.

Arthur C Clarke reminds us that this is, in fact, the product of discipline, ingenuity and time. Our role as investors is not to be spellbound, but to understand what lies behind the curtain: which businesses are building enduring value as today’s marvels become tomorrow’s mundanity.

As we look to the year ahead, we remain focused on backing a small number of exceptional companies with the ability to compound progress long after the magic fades.

Risk Factors

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in March 2026 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

Potential for Profit and Loss

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.

All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.

The images used in this communication are for illustrative purposes only.

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