The creative financing underpinning AI growth
Why AI Growth Needs Funds
The growth of AI and its insatiable demand for funds to continue the growth curve is creating new financing structures moving away from simple net revenue based funding over 10 to 30 year terms. Equity raisings continue, but are not enough.
Free cash flow from the business is not available when losses exceed revenue or revenue is otherwise insufficient. One of the reasons for this is AI is different to traditional software. AI costs rise linearly with usage; there is no marginal cost saving.
Chips are not good collateral. Their useful life is probably up to 5 years. The more innovation with chips the faster they depreciate and the faster revenue generation and values fall .
Another issue is that the energy and water usage by data centres is substantial and costly.
The cost, source and availability of energy is uncertain and has competing uses. There are, however, new technologies evolving which will make energy and water use in data centres more efficient and lower costs. Nvidia has invested in a pre IPO developer, Firmus Technologies, who are developing this software. If it succeeds, Firmus will become a sales channel for Nvidia’s chips.
OpenAI has committed to build 23 gigawatts of new data centre capacity. It will need 10 gigawatts of power, probably sourced from renewables. Renewables will likely become part of the AI ecosystem to lock in the supply chain.
Further, locations can become stranded or overcapacity built in certain locations. The analogy is what happened in the early 2000s with telcos and fibre optics.
A one gigawatt data centre built today is a $US 50 billion investment, which breaks down to $US 35 billion for chips and $US 15 billion for the land, power and infrastructure shell. That means 30 per cent of the cost can be secured in the traditional way, but the other 70 per cent is moving quicksand with a short lifecycle. However, if the user of the data centre is a sovereign citizen with a “firm” contract, that will improve the security on offer.
In short, AI infrastructure funding is not ‘normal’ infrastructure funding.
Creative financing and interdependence
The AI industry is evolving its own ecosystem to do creative funding. Much like how Japan’s post war Keiretsu groups formed alignments of incentives, AI companies are aligning by making interconnected deals.
It is circular financing. Companies invest in each other, buy each other’s products and push up the value of their stock prices. An illustration of this circular financing is the recent OpenAI and AMD warrant deal:
- OpenAI commits to buying billions of dollars of AMD AI chips.
- In return, AMD grants AI warrants to purchase up to 160m of its shares (10 per cent of AMD’s issued capital) at a nominal price of 1 cent per share.
- Upon announcement of the deal, AMD stock went up 24 per cent.
- There are conditions on the deal. The deal only vests if Open AI buys six gigawatts of AMD chips, hits certain milestones and the AMD share price triples.
- If all targets are hit, the deal will bring in US$100 billion of AMD stock.
Anthropic has made similar deals on a smaller scale than that of OpenAI, raising US$8 billion from Amazon, uses Amazon chips, and helps sell Amazon’s services.
Anthropic has diversified, taking a US$3 billion investment from Google and joining with infrastructure provision.
The motivation is vested interest in each other’s success.
The superscalers like Nvidia, Amazon and Google are trillion dollar companies with fortress balance sheets. Their strength is growth through the strong balance sheets and strong interconnected relationships of GPU assets, data centre infrastructure, selling their services and, although not yet anchored to the foundations, efficient low carbon energy supply.
It is a tightly linked chain. Warrants are a frontier technique for strengthening the bonds. Structuring the conditions on the deal and negotiating the milestone triggers are the creative part, shaped for each deal.
We understand and have the legal expertise to put together these deals for clients.