5 ms·

> Some investors have questioned such deals because companies like Google and Amazon are investing money that ends up bolstering their own revenues. This is br

> Some investors have questioned such deals because companies like Google and Amazon are investing money that ends up bolstering their own revenues. This is brilliant. It's a win-win for cloud providers like Microsoft and Amazon to invest billions into AI companies because the "investment" is guaranteed to flow back in as cloud revenue (on which they have huge valuation multiples) regardless of the AI company's fate or eventual profitability. The AI companies then get to quote massive valuations based on these investments, even though the investments were made under very unique circumstances (ie "most of this investment will flow back to us as revenue"). Finally, other investors[1] who do not benefit from the cloud spending and who may be less discerning on price will FOMO in at whatever the current valuation is. These investments not only have no stipulations about how the funds are used, but often aren't used for the business at all - instead directly paying out founders/employees. It's a brilliant triple whammy - the technology itself is super impressive, cloud providers are naturally motivated to pump up baseline valuations due to the symbiotic relationship of exclusive cloud spend, and these valuations are taken at face value by non-cloud-provider investors eager to get in on AI hype at whatever the prevailing price is. [1] https://www.theinformation.com/articles/thrive-capital-to-lead-purchase-of-openai-employee-shares-at-80-billion-plus-valuation https://www.theinformation.com/articles/thrive-capital-to-le...

Mistletoe 3y ago
Yes we’ve traditionally called it a Ponzi scheme or pyramid. We are in the part of the cycle where no one actually has to make money from AI. We’ve been here before with Uber and WeWork. All these free queries aren’t free and run on incredibly expensive hardware. The final endgame is a Dyson sphere around the sun so that we can ask ChatGPT-XX if it’s raining outside and the owners of the AI and chip companies blast off to their colony on Mars.
- lotsofpulp 3y ago
  How is it a Ponzi scheme or pyramid?
  - datadrivenangel 3y ago
    You use later stage investments to pay off the earlier investors. Eventually, you go and IPO and the general public cashes out the later investors and then the stock goes to zero.
    - lotsofpulp 3y ago
      Is the plan or expectation of the stock to go to zero (or otherwise dropping precipitously)? If not, I do not see the value in labeling it a Ponzi scheme. If there exists a business plan and the bet is to invest in something that provides utility, then it seems like any other investment in any other business.
bryanlarsen 3y ago
That's what caused the 2002 crash. 99% of the revenues for internet companies came from other internet companies. When the easy money started drying up, revenues collapsed.
- reactordev 3y ago
  We'll just increment the version number at the end of Web like we always have.
  - chambored 3y ago
    Finally time for Web4
- gumby 3y ago
  99%? Let's not forget the hardware suppliers (e.g. Sun, Cisco, and so many others) who sold hardware to startups and loaned them the money to buy said hardware. They then had hardware revenue to tell shareholders about as well as interest revenue and the NPV of the loan on their balance sheets. What could possibly go wrong? We all know...and it did.
  - dustingetz 3y ago
    isn't that kind of like Toyota financing my car loan
    - bombcar 3y ago
      It's somewhat similar, but Toyota (hopefully) won't have all of its car buyers stop paying the loans at the same time.
    - gumby 3y ago
      Indeed it is and that approach nuked both GM and GE. As bombcar noted in a parallel comment though, it was even worse in the Internet crash. I suppose in today's Bayes-obsessed world another lesson is: don't finance your customers' purchases if your company name is a two-letter acronym starting with G.
georgelyon 3y ago
Additionally, such an investment effectively makes it cheaper to acquire the company down the line (since they already own some percentage of it). In such a scenario their investment would both flow back as revenue and reduce to the eventual cost of acquiring such a company.
yinser 3y ago
Bill Gurley and Brad Gerstner have a new podcast and discussed exactly this in their first episode, https://youtu.be/Wu_LF-VoB94?si=E1M0RmiKVN4FG9b9&t=523 https://youtu.be/Wu_LF-VoB94?si=E1M0RmiKVN4FG9b9&t=523 (8:43) "from a company's perspective it's like taking out of your left pocket and putting it in your right pocket ... I mean a big skeptic would say you're using your balance sheet to to drive your your income statement which you know should be a no-no"
- lenerdenator 3y ago
  CFO: "Don't care; line went up."
  - datadrivenangel 3y ago
    Next CFO: "Line went down due to previous CFO. Time for Layoffs."
    - baq 3y ago
      Not sure why you’re being downvoted; maybe for the completely unnecessary ‘Next’? ;)
- fnordpiglet 3y ago
  A realist would say the money is spent somewhere and better on your platform. Once infrastructure is built it’s hard to offload, so the margin comes from future spend. But revenues are still revenues, and the capital spend is invested in capital growth to support the load from the investment.
- nostrademons 3y ago
  It's very similar to the wash-trading pump & dumps common in the crypto space. Feed money back to yourself at inflated prices to make the line go up, convince dumber money to enter the market based on the line going up, cash out at their expense. Somehow it's illegal when a crypto company does it but not when a major tech executive does it.
lotsofpulp 3y ago
> These investments not only have no stipulations about how the funds are used, but often aren't used for the business at all - instead directly paying out founders/employees. Pay for employees is a business expense.
_heimdall 3y ago
It may be brilliant, but in my book that sure sounds like it should be illegal and likely regulated as anticompetitive behavior. I expect it isn't actually illegal today, they pay plenty of expensive lawyers to cover their ass, but I don't think a majority of the public would want this to be legal if they understood what was being done.
- bee_rider 3y ago
  It certainly has a “too clever” vibe to it. But, who is it anti-competitive from or to? I wonder if there’s evidence out there that the cloud providers are selectively investing in AI companies that use their clouds. That would be a little sketchy I guess. But if Amazon, Microsoft, and Google all pump up AI companies generally with the expectation that it’ll generally benefit their sector, that seems… fine, I guess? Or at least not anti-competitive.
  - _heimdall 3y ago
    It'd be anticompetitive to any newcomers in the hosting space, wouldn't it? Fly.io recently launched a GPU product. If they can't afford to front $10B to OpenAI they're locked out of the market. That also doesn't get to a potential money laundering issue. Again I assume it isn't technically illegal accounting, but Microsoft sure seems to have functionally moved money from one side of the books to the other, delaying and reducing potential taxes they would end up paying.
    - bee_rider 3y ago
      > It'd be anticompetitive to any newcomers in the hosting space, wouldn't it? > Fly.io recently launched a GPU product. If they can't afford to front $10B to OpenAI they're locked out of the market. That seems like the first scenario I described. If MS was investing in OpenAI contingent on their using MS’s cloud, then yeah it seems obviously anticompetitive, right? In this scenario, if the investment is contingent on OpenAI using MS’s cloud, that seems just blatantly anticompetitive. If it is not, I don’t see any problem. If MS selectively invests in companies that are already using their cloud services and hopes they stay by inertia… I dunno, seems grey.
dh2022 3y ago
This inter-company accounting gimmick should be eliminated so it does not increase reported revenue: https://www.accountingtools.com/articles/what-are-intercompany-eliminations.html https://www.accountingtools.com/articles/what-are-intercompa...
jiveturkey 3y ago
I'm not sure I would call it brilliant. I mean, it is, but it's also SOP.
deleted 3y ago
[deleted]
cavisne 3y ago
One additional factor is you need to beg for GPU capacity from cloud providers, so they are investing in them, and also giving them preferential capacity over companies they don’t invest in.
charcircuit 3y ago
>because the "investment" is guaranteed to flow back in as cloud revenue But it can't flow back in as profit. Cloud providers are giving away GPUs for free in a time when GPUs are scarce and could be rented out for a premium. This isn't as free of a scheme as you make it sound.
- baq 3y ago
  Who cares about profit if you’re growing revenue 100% yoy as a megacap
  - charcircuit 3y ago
    Because it does not grow revenue long term.

Mistletoe 3y ago

Yes we’ve traditionally called it a Ponzi scheme or pyramid. We are in the part of the cycle where no one actually has to make money from AI. We’ve been here before with Uber and WeWork. All these free queries aren’t free and run on incredibly expensive hardware. The final endgame is a Dyson sphere around the sun so that we can ask ChatGPT-XX if it’s raining outside and the owners of the AI and chip companies blast off to their colony on Mars.

lotsofpulp 3y ago
How is it a Ponzi scheme or pyramid?
- datadrivenangel 3y ago
  You use later stage investments to pay off the earlier investors. Eventually, you go and IPO and the general public cashes out the later investors and then the stock goes to zero.
  - lotsofpulp 3y ago
    Is the plan or expectation of the stock to go to zero (or otherwise dropping precipitously)? If not, I do not see the value in labeling it a Ponzi scheme. If there exists a business plan and the bet is to invest in something that provides utility, then it seems like any other investment in any other business.

bryanlarsen 3y ago

That's what caused the 2002 crash. 99% of the revenues for internet companies came from other internet companies. When the easy money started drying up, revenues collapsed.

reactordev 3y ago
We'll just increment the version number at the end of Web like we always have.
- chambored 3y ago
  Finally time for Web4
gumby 3y ago
99%? Let's not forget the hardware suppliers (e.g. Sun, Cisco, and so many others) who sold hardware to startups and loaned them the money to buy said hardware. They then had hardware revenue to tell shareholders about as well as interest revenue and the NPV of the loan on their balance sheets. What could possibly go wrong? We all know...and it did.
- dustingetz 3y ago
  isn't that kind of like Toyota financing my car loan
  - bombcar 3y ago
    It's somewhat similar, but Toyota (hopefully) won't have all of its car buyers stop paying the loans at the same time.
  - gumby 3y ago
    Indeed it is and that approach nuked both GM and GE. As bombcar noted in a parallel comment though, it was even worse in the Internet crash. I suppose in today's Bayes-obsessed world another lesson is: don't finance your customers' purchases if your company name is a two-letter acronym starting with G.

georgelyon 3y ago

Additionally, such an investment effectively makes it cheaper to acquire the company down the line (since they already own some percentage of it). In such a scenario their investment would both flow back as revenue and reduce to the eventual cost of acquiring such a company.

yinser 3y ago

Bill Gurley and Brad Gerstner have a new podcast and discussed exactly this in their first episode, https://youtu.be/Wu_LF-VoB94?si=E1M0RmiKVN4FG9b9&t=523 https://youtu.be/Wu_LF-VoB94?si=E1M0RmiKVN4FG9b9&t=523 (8:43) "from a company's perspective it's like taking out of your left pocket and putting it in your right pocket ... I mean a big skeptic would say you're using your balance sheet to to drive your your income statement which you know should be a no-no"

lenerdenator 3y ago
CFO: "Don't care; line went up."
- datadrivenangel 3y ago
  Next CFO: "Line went down due to previous CFO. Time for Layoffs."
  - baq 3y ago
    Not sure why you’re being downvoted; maybe for the completely unnecessary ‘Next’? ;)
fnordpiglet 3y ago
A realist would say the money is spent somewhere and better on your platform. Once infrastructure is built it’s hard to offload, so the margin comes from future spend. But revenues are still revenues, and the capital spend is invested in capital growth to support the load from the investment.
nostrademons 3y ago
It's very similar to the wash-trading pump & dumps common in the crypto space. Feed money back to yourself at inflated prices to make the line go up, convince dumber money to enter the market based on the line going up, cash out at their expense. Somehow it's illegal when a crypto company does it but not when a major tech executive does it.

lotsofpulp 3y ago

> These investments not only have no stipulations about how the funds are used, but often aren't used for the business at all - instead directly paying out founders/employees. Pay for employees is a business expense.

_heimdall 3y ago

It may be brilliant, but in my book that sure sounds like it should be illegal and likely regulated as anticompetitive behavior. I expect it isn't actually illegal today, they pay plenty of expensive lawyers to cover their ass, but I don't think a majority of the public would want this to be legal if they understood what was being done.

bee_rider 3y ago
It certainly has a “too clever” vibe to it. But, who is it anti-competitive from or to? I wonder if there’s evidence out there that the cloud providers are selectively investing in AI companies that use their clouds. That would be a little sketchy I guess. But if Amazon, Microsoft, and Google all pump up AI companies generally with the expectation that it’ll generally benefit their sector, that seems… fine, I guess? Or at least not anti-competitive.
- _heimdall 3y ago
  It'd be anticompetitive to any newcomers in the hosting space, wouldn't it? Fly.io recently launched a GPU product. If they can't afford to front $10B to OpenAI they're locked out of the market. That also doesn't get to a potential money laundering issue. Again I assume it isn't technically illegal accounting, but Microsoft sure seems to have functionally moved money from one side of the books to the other, delaying and reducing potential taxes they would end up paying.
  - bee_rider 3y ago
    > It'd be anticompetitive to any newcomers in the hosting space, wouldn't it? > Fly.io recently launched a GPU product. If they can't afford to front $10B to OpenAI they're locked out of the market. That seems like the first scenario I described. If MS was investing in OpenAI contingent on their using MS’s cloud, then yeah it seems obviously anticompetitive, right? In this scenario, if the investment is contingent on OpenAI using MS’s cloud, that seems just blatantly anticompetitive. If it is not, I don’t see any problem. If MS selectively invests in companies that are already using their cloud services and hopes they stay by inertia… I dunno, seems grey.

dh2022 3y ago

This inter-company accounting gimmick should be eliminated so it does not increase reported revenue: https://www.accountingtools.com/articles/what-are-intercompany-eliminations.html https://www.accountingtools.com/articles/what-are-intercompa...

jiveturkey 3y ago

I'm not sure I would call it brilliant. I mean, it is, but it's also SOP.

deleted 3y ago

[deleted]

cavisne 3y ago

One additional factor is you need to beg for GPU capacity from cloud providers, so they are investing in them, and also giving them preferential capacity over companies they don’t invest in.

charcircuit 3y ago

>because the "investment" is guaranteed to flow back in as cloud revenue But it can't flow back in as profit. Cloud providers are giving away GPUs for free in a time when GPUs are scarce and could be rented out for a premium. This isn't as free of a scheme as you make it sound.

baq 3y ago
Who cares about profit if you’re growing revenue 100% yoy as a megacap
- charcircuit 3y ago
  Because it does not grow revenue long term.