The past year witnessed a series of remarkable market developments that many traditional investors have struggled to contextualize. We believe these fit into a broad narrative of what is happening in the investment world. Something that we aim to lay out in this outlook piece.
In what might be called a "tale of two markets," we have witnessed an unprecedented level of value creation that has defied conventional analysis. Traditional valuation metrics have struggled to capture the true potential of companies operating at the frontier of technological innovation, while the line between public and private markets have continued to blur.
2024 saw value creation that defied traditional metrics and analysis
Public Markets
In the public sphere, we witnessed remarkable valuations and growth. Tesla added $850B in market capitalization between October-December 2024, exceeding the combined value of the next 10 automakers – something that would seem impossible through the lens of traditional auto industry metrics. The cryptocurrency market demonstrated similar defiance of conventional valuation, with total market capitalization essentially doubling to over $3.5 trillion. Perhaps most tellingly, Nvidia’s earnings more than doubled from $27B to $61B year-over-year, highlighting how companies at the forefront of technological transformation are achieving growth rates that would have seemed implausible just a few years ago.
Private Markets
The private market, meanwhile, demonstrated that massive value creation no longer requires public market participation. Databricks secured the largest venture capital raise of 2024 at $10B, reaching a $62B valuation. OpenAI achieved a $157B valuation with a $6.6B raise, while Elon Musk's xAI reached a $50B valuation with a $6B raise. Other notable AI companies securing major valuations included CoreWeave ($19B), Anthropic ($18.4B with Amazon backing) and Anduril Industries ($14B). These valuations, achieved entirely in private markets, rival or exceed those of many established public companies in similar sectors.
What makes these developments particularly noteworthy is not just their scale, but their interconnected nature. The companies achieving these extraordinary valuations – whether public or private – share common characteristics: they operate at the frontier of technological innovation, benefit from powerful network effects, and often create entirely new market categories rather than competing in existing ones. Traditional financial metrics and analysis frameworks, developed in an era of linear growth and physical constraints, struggle to capture the potential of businesses that operate on exponential curves.
The challenge of investing in this new environment is multifaceted, but we can break it down into two critical dimensions. First, there's the institutional framework problem. Traditional institutional investors operate within strict parameters: sector allocations, diversification requirements, benchmark tracking, and risk management frameworks that were designed for a different era. These constraints become particularly problematic when dealing with winner-take-all businesses that capture exponential returns. The stark reality is that these exceptional companies – whether they're dominant AI chip manufacturers or leading software platforms – tend to capture not just the majority of the economic value in their sectors, but often the vast majority of the future growth potential as well.
Conventional investment frameworks struggle to capture exponential growth opportunities
Consider the semiconductor sector as an example. An institutional manager who takes a sector-based approach by investing in the SOXX semiconductor ETF ends up with a 12.9% return for the year (well below even the S&P500 –this in spite of making the right sector call), while NVIDIA returns 171%. And the massive performance differential isn't just an anomaly –the same pattern repeats across sectors: from cloud computing to social media to electric vehicles, where market leaders capture disproportionate returns through powerful combination of network effects, scale advantages, and technology moats. Traditional portfolio theory, with its emphasis on diversification and sector-based thinking, can actually work against investors by diluting exposure to these exceptional companies.
The divide between public and private markets is becoming obsolete and value- destructive
The second challenge of investing in this new environment is the artificial divide between public and private markets. This traditional separation, deeply embedded in the investment industry's structure, is becoming increasingly obsolete and potentially value-destructive for investors. Companies like Databricks and SpaceX easily raise billions in private markets while maintaining the operational flexibility of private companies. "We are operating as a public company already," Databricks's chief Ali Ghodsi told the Financial Times about its recent fundraise oversubscribed he said investors had offered them close to twice the $10bn raised.1
This evolution has left equity analysts at a disadvantage, often unable to analyze leading players that remain outside their traditional universe and metrics. The challenge goes beyond just access to data – it reflects a fundamental mismatch between traditional equity analysis frameworks and the economics of modern technology companies. Take Anthropic or DeepMind – their value isn't just in current products or revenues, but in their ability to push the boundaries of artificial intelligence and potentially create transformative technologies. This type of value creation simply doesn't fit neatly into the quarterly earnings-focused framework that dominates public market analysis.
The "Silicon Valley" approach is disrupting traditional industries and business models
In this new paradigm, one needs to approach investments through a different lens, focusing on companies exhibiting not just exponential growth but unique approaches to business. Across industries, traditional companies are giving way to the "Silicon Valley Way". Something that we believe will only continue to accelerate further.
The defense industry exemplifies this shift. As Christopher Kirchhoff and Raj M. Shah discuss in their book, "Unix X: How the Pentagon and Silicon Valley Are Transforming the Future of War," newer companies with Silicon Valley DNA that prioritize agility, modularity, and innovation, are taking market share from the legacy "Primes" like Raytheon, Lockheed Martin, and Northrop Grumman. These older companies, which have become encumbered by bureaucracy despite (or maybe because of) their established Pentagon relationships, are no longer able to compete with the new breed of startups – something that is reflected more and more in their stock prices.
Traditional market analysis and institutional frameworks are struggling to capture the true value and potential of today's most innovative companies. The convergence of public and private markets, combined with the rise of Silicon Valley methodologies across sectors, signals a fundamental shift in how we should approach investment opportunities. Below, we lay out our views of specific sectors that we believe are particularly well-positioned for this change.
Life Sciences
Why we like it: The convergence of AI, computational biology, and advanced diagnostics is fundamentally changing drug discovery and development. Companies can now design and test molecules in silico, dramatically reducing time and costs while increasing success rates. The ability to analyze complex biological data at scale is enabling personalized medicine approaches that were previously impossible.
Why it fits the paradigm: Traditional pharma companies with stage-gate development processes and massive overhead are being outpaced by nimble biotechs using AI-first approaches. The economics of drug development are shifting from a purely trial-and-error approach to a more predictable, technology-driven model.
AI-powered drug discovery and computational biology are revolutionizing medicine
AI Infrastructure
Why we like it: The exponential growth in AI model complexity is driving massive demand for specialized computing infrastructure. This isn't just about chips – it's about the entire stack from silicon to cooling systems to software optimization.
Why it fits the paradigm: Traditional hardware companies designed for general-purpose computing are being displaced by specialists optimizing for AI workloads. The winners are capturing exponential returns through deep technological know-how and strong network effects.
Energy
Why we like it: The intersection of AI and energy is creating unprecedented opportunities for optimization and innovation. From real-time grid management to small modular reactor design, AI is transforming how we generate, distribute, and consume energy. At the same time, the unprecedented demand for energy by AI, has given new impetus to the problem.
Why it fits the paradigm: Traditional energy companies view AI as an add- on to existing processes, while the new generation of energy companies are building AI-first approaches to energy problems, using software and advanced materials to solve fundamental challenges in energy storage, transmission, and generation.
Defense
Why we like it: Modern warfare is increasingly about technological superiority rather than just industrial capacity. Software, autonomous systems, and advanced materials are becoming just as important as traditional military hardware. Broader geopolitical factors are also at play, as we cover in a separate note on “The Rise of Economic Nationalism”.
Why it fits the paradigm: Traditional defense contractors, optimized for long procurement cycles and complex regulations, are being disrupted by Silicon Valley-style companies bringing commercial technology innovation to defense applications.
Crypto/Digital Assets
Why we like it: While current applications and valuations may be uncertain, the fundamental technological progress in financial infrastructure and things like digital fractional ownership continues to accelerate.
Why it fits the paradigm: Traditional financial institutions, built on centralized trust and manual processes, are being challenged and the nature of financial services is fundamentally being reshaped. At the same time, we are still in the early stages of this technology, making traditional valuation premature.
Strategic diversification, proactive hedging, and a long-term perspective will be key to navigating near-term volatility while positioning for eventual stabilization.
The above investment themes are explored further in our regular insight pieces and will continue to be featured in ongoing future analysis.
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