The Weekly (3/29)

Venture capital investing is infamous for being a highly competitive arena, traditionally dominated by a handful of firms who have the longest track records, biggest pockets, and largest networks.

In a time when venture capital investing has slowed down for a variety of reasons (think: troubled valuations, a changing fundraising environment, higher interest rates, and less risk appetite, among others), a new class of investors have pulled up a seat to Sand Hill Road’s proverbial table and they’re some of the biggest players in the Valley: Microsoft, Amazon, and Google.

Following a $1.25 billion investment in September of 2022, Amazon announced plans to double down on their Anthropic bet on Wednesday adding an additional $2.75 billion in invested capital.

What’s interesting is that the investment, much like Microsoft’s deal with OpenAI, includes some variation of credits towards Amazon’s cloud offerings.

What does that mean exactly?

The likes of Anthropic and OpenAI require an immense amount of computing power to train their models and the cloud giants can help. These ‘strategic collaborations’ include contingencies that require the company to leverage the investor's cloud services instead of shopping around to other providers for the best product, price and service.

It’s an interesting new wrinkle in venture investing that has gotten our wheels turning.

From the perspective of Amazon or Microsoft, these investments are an interesting take on financial engineering.

The cloud providers are investing capital into a business, partnering in their future success, implementing the tooling across their suite of offerings, and are doing so by essentially taking cash out of their left pocket and placing it into their right pocket. Or in financial terms: using their balance sheet to drive the income statement.

There are rumors around whether the investments were all cash or a mix of credits, but the idea still holds true. Balance sheet to income statement.

The outflow of cash in dollars may seem large, but those dollars, thanks to their strategic partnership, will eventually flow back into the business via cloud consumption. The merits of these revenues can be debated given it's cashless revenue, but if the large language models are successful, the low quality revenues today should eventually turn into high quality revenues down the road.

If the largest AI companies demand these sorts of cash and compute deals, the impacts could potentially change the required resources for investors to participate. In the most extreme case, even disqualify the traditional venture capitalist from consideration.

Another impact of these deals is that these investments may be driving valuations for the AI companies artificially higher.

Understanding that the cost for Big Tech not to strike a deal is extreme, the Amazons and Microsofts of the world are happy to pay a premium to not only sit at the cutting edge of innovation, but also protect their current and future competitive moats.

If the top of the market is being bought at a premium, could this have downstream impacts across the entire complex?

A final thought: these deals are an interesting way for the ever scrutinized Big Tech to avoid antitrust complaints. In a world where partnering instead of purchasing avoids regulatory oversight, these types of deals may be more common as time goes on.

To quote Eric Vishria from Benchmark Capital, “AI is a game of emperors”. Those with the most data and most capital should win in the end. Who better to partner with than those who have both.

Have a great weekend,

– Your Titan team

Disclosures:

As of writing, AMZN, GOOGL, and MSFT are holdings in Titan's Flagship strategy. As of writing, Anthropic is a 8.84% holding in the ARK Venture Fund.

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