The Information's TITV
00:58:45 · Nicole Su
[00:58:45] S3: I think it's what's really interesting, like from my seat, I'm definitely seeing I think we all see there is a huge demand for compute. Like, we don't need to debate that. And then there is also a huge wave of new companies being formed and trying to become neo cloud and who all need a capital injection. So you can see there's a big gap of, yes, there's a huge need to compute, in shortage for sure. And yes, there's a bunch of people who really want to start building out this compute. They have access to a specific piece of powered land or they have something they have unique access. But the really missing link is that we don't really have the capital today to breach this. I think investors historically has become very used to financing customer offtake contracts. The reason why they are willing to lend is because of the quality of their customers, right? Most of the time, these are hyperscalers. However, we're in this next wave of, hey, a lot of AI compute demand is coming from AI native companies or new labs where like there is no really truly rated credit for any of these companies. So I think lenders are definitely become more and more cautious when it comes to companies who are actually serving that bunch of companies. So I'm seeing that, I guess, the missing link is very much like the investors' willingness to back these type of companies and the level of risks they are willing to take, and then the costs come come with that.
01:00:05 · Stephanie Palazzolo, Nicole Su, Jessica Lessin, Anne Wojcicki
[01:00:05] S0: I see. So it's kind of understanding how risky are these businesses because we don't we don't know how risky their customers are because these are kind of new types of companies that haven't really existed before. Mhmm. Do you think we're gonna see a spat of fire sales or some of these companies going bankrupt in the next year? [01:00:24] S3: I think it's... That's a bit [01:00:25] S1: of extreme. Like I said, I don't [01:00:27] S3: think the fundamentals have changed. Right? There's still huge demand for compute. There is a shortage, and some of these public companies are very well run. I think that the problem is more about the group of companies I just talked about earlier, like this newer neo clouds who are trying to look for financing to really build on the next batch of compute capacity. I don't think anybody is going to go bankrupt because the compute they currently have is more about, like, can they even find enough capital to build out what we need for the future. [01:00:56] S0: Yeah. That makes a [01:00:57] S5: lot of sense. Mhmm. [01:00:58] S0: You know, obviously, the big news of this week was the Anthropic s one that dropped on Monday. I don't know if you can speak to it directly, but, you know, looking at that, I was... It was very interesting to see investors' reactions and the types of metrics that they're really paying attention to. I mean, generally, like what are you hearing from investors in terms of what metrics are they looking for in these S1s of these big model developers that are heading to the public market soon?
01:01:22 · Nicole Su
[01:01:22] S3: Yeah. I can certainly talk this in a broader general terms for Frontier Labs. Me personally, right, if the first number I would focus on is very much gross margin, but I also understand, I need to understand what does gross margin really mean for these companies because the definition could be very different. I think we had this huge debate around like the difference between two Frontier Labs and how they define revenue, right, that obviously would translate into gross margin. But then I think more importantly, would just go straight to, if I want to cut out all the noise and differences, I would go straight down to free cash flow, right? How much cash are these guys burning? And it because if they are bringing less cash, is it because they underinvested previously, or is it because truly they have a more efficient model when it comes to... Business model and comes to finance their growth? So it's very much like, Hey, let's look at gross margin, how healthy it is, but obviously be very clear on differences in definition, at same time also looking at cash flow and see, you know, what's the burn and what's not just the today, but the future and then the likelihood of, you know, getting to profitability in a more sustainable way. Totally. And, you know, we've read
01:02:30 · Stephanie Palazzolo, Nicole Su, Jessica Lessin
[01:02:30] S0: a lot about the different definitions for gross margins here, both in terms of, you know, most of the time they don't count the compute use for training, but even Anthropic versus OpenAI, there's differences in how they account for, you know, the revenue they're getting from cloud partners. It can get very confusing. Totally get why you, at the end of the day, just kind of look at what's happening with, with cash. I mean, how much do you think is riding on the performance of these big model developer IPOs coming in the upcoming months? If they go badly, is the IPO market closed? Like, what's what's gonna happen? [01:03:01] S3: Well, I don't have a crystal ball. I... [01:03:03] S1: As a banker, I surely hope it all goes well. [01:03:07] S3: And then we obviously use a lot of high quality companies in the pipeline looking to go public post some mega IPOs. So my hope is they will go well [01:03:16] S0: and then we'll see surging AI IPOs. Yeah. And the AI labs have also been, you know, quite aggressive when it comes to acquiring startups as well. What types of companies are the labs interested in? Where do you kind of expect to see more M and A activity when it comes to these smaller AI startups?
01:03:16 · Stephanie Palazzolo, Nicole Su
[01:03:16] S0: and then we'll see surging AI IPOs. Yeah. And the AI labs have also been, you know, quite aggressive when it comes to acquiring startups as well. What types of companies are the labs interested in? Where do you kind of expect to see more M and A activity when it comes to these smaller AI startups? [01:03:35] S3: Yeah. The way I think about the lab's M and A strategy is very much aligned with capturing economic value of AI because obviously they all have approved the capability of the AI, but we are at this point where we want to make sure AI diffusion is happening, but when it's happening, the labs obviously would want to capture a piece of that. So the way you can do it is very much going up and down the tech stack, I think many of them made effort in terms of acquisitions in specific verticals and acquisitions in application layers. At the same time, they also would go down the supply chain of AI, right, getting down to the compute layer, the chip layer. So I think you will see this more verticalized approach for the labs to be able to capture more economic value, at the same time also like acquiring some application layer companies or deployment companies to really make sure that they actually capture the end customers as well and be part of the AI diffusion, not just the creation of intelligence. Mhmm.
01:03:35 · Nicole Su, Stephanie Palazzolo, Brittany Greenfield
[01:03:35] S3: Yeah. The way I think about the lab's M and A strategy is very much aligned with capturing economic value of AI because obviously they all have approved the capability of the AI, but we are at this point where we want to make sure AI diffusion is happening, but when it's happening, the labs obviously would want to capture a piece of that. So the way you can do it is very much going up and down the tech stack, I think many of them made effort in terms of acquisitions in specific verticals and acquisitions in application layers. At the same time, they also would go down the supply chain of AI, right, getting down to the compute layer, the chip layer. So I think you will see this more verticalized approach for the labs to be able to capture more economic value, at the same time also like acquiring some application layer companies or deployment companies to really make sure that they actually capture the end customers as well and be part of the AI diffusion, not just the creation of intelligence. Mhmm. [01:04:34] S0: Great. Okay. Well, thank you so much. We'll have to have you back on after Anthropic is public to talk about how things go. Sounds great. That was Nicole Su, UBS' head of AI investment banking in The Americas here on TITV. Brittany Greenfield is the founder and CEO of Wabbi, a cybersecurity startup focused on helping companies build secure software. Brittany, welcome to the show. [01:05:08] S4: Thanks so much for having me, Stephanie.