All right, everybody. Welcome back to the number one podcast in the world.
Actually, you manifested. We actually were number one. How good is that?
We were literally number one last week. Only took a little bit of time to get there.
Only took five. Yeah. Five years went by so quickly. Uh, with us today, David Sacks is back. How are you doing, brother?
Good. You good? Yeah. It's good being number one.
Yeah, it's good to be number one. I agree. Yeah, I agree.
I've done an excellent job.
You've done a very good job. And now, beautiful. Now we'll see who takes the most credit for the ascension of the All-In podcast. Uh, over to you, Chamath Palihapitiya. How's your week been?
It's great being the number one position. Yeah, it's great being the best. I mean, we would have... I feel like Sacks and I would have gotten here at least 18 months sooner had we not had to drag you on our back.
Oh, okay. The point guard who actually put all those dimes and positioned the ball everywhere you guys wanted it. Yes, you would have, you certainly would have gotten there eventually if you guys actually knew how to start.
Where would we be without your constant interruptions?
Sooner. We would have been number one sooner.
You would, you would be where every other tech podcast is in the 400s. And joining us this week in replacement of venture... also number one, also number one, number one venture capital firm in assets under management, I believe.
Certainly. None other, sir, then Ben Horowitz is here. Hey Ben, how are you?
I am doing well. Thank you for having me on the show. Uh, it's great to be with the number one team.
Yes, the number one podcast in the world. How does it feel to be on the number one podcast in the world? Have you, has it, you know, like have you soaked it in yet, Ben? Is it just...
Yes. Yeah, it is awesome. I feel bigger already.
It is kind of amazing that a tech podcast could be the number one podcast on... That is bizarre. Apple Podcasts last weekend.
Big docket this week. Uh, good to have you here, Ben. And uh, Friedberg is busy saving the world from famines and he'll be back next week for all of you.
He retired. He retired at number one. Yeah, he just, he walked off the court.
Oh, that's hilarious. Well, um, we've had an eventful week. We uh, may have actually had the AI bubble, if there is one, pop or deflate a little bit. The neoclouds got crushed this week after uh, CoreWeave's bonds started to sell off. Could be the canary in the coal mine. We'll find out. Uh, CoreWeave, Lambda, Nebius, these are all the biggest neoclouds. They're all down about 20% as publicly traded companies. Here's your chart. Here's what happened. Just a little bit of background. On Tuesday, a bunch of people on X, including @chamath, pointed out that the yield on some of CoreWeave's debt had hit 15%.
The yields uh, are obviously rising because bond traders are worried about CoreWeave's ability to generate enough cash to support its debt. So they want a higher rate of return. Obviously, adding to Chamath's little tweet was a friend of the pod, Elon Musk, who decided to contribute five letters, one word that has since been heard around the world and is at the start of every story. He said, "Yikes." And that generated a bunch of headlines. Then everything tanked yesterday, Wednesday, we tape on Thursdays, as many of you know. CoreWeave, Lambda, Nebius down between 10 and 15%. Even Oracle uh, and Dell took some strays. Nvidia uh, took a stray as well. They were down 3%.
CoreWeave is the tip of the spear. They've raised over $35 billion. We had uh, the founder, we had the founder Michael Intrator on the All-In podcast back in March in which he explained to me on the All-In interview show what he called the box. Let's roll that tape and get Chamath's thoughts.
How does all that debt work? That is something that you guys specialize in.
I'm going to try to explain this in a way people can understand. So, we go out and we find a client. Let's use Microsoft. You brought them up before, right? And Microsoft comes to us and says, "We'd like to buy some compute from you." And we say, "Okay, great. We're going to sign a contract." Once I have a contract in hand, then what I do is I create something. It's not a particularly creative name. It's called the box.
And what I do with the box is I take my contract with Microsoft and I put it in the box. I go to Jensen and I buy the GPUs. I put it in the box. I take my data center contract, I put it in the box. And now the box governs cash flow and it has a waterfall of cash flow that comes into it and goes out of it. And so the way it works is then I build the compute and then I deliver the compute to Microsoft and they pay the box. They don't pay me. It goes into the box and the first thing it does is it pays the data center. It pays the power bill. It pays the interest and the principal and then whatever's left flows back to us. What's important to understand is the economics in this box are such that within two and a half years of a five-year deal, we have paid for everything. They don't cross-pollinate. They don't cause contagion across the boxes. They're all independent and discrete. As you do this and as you show the lenders how this financing tool and how this financing mechanism works, what they do is they continue to lend you money at progressively lower rates.
Okay, Chamath, that seemed like a completely reasonable explanation of how they were running the business and that each of the boxes were isolated, but something has changed in the last six months. What is that and uh, what's changed here and your insights into his financial innovations?
I would say uh, with CoreWeave, the most important thing that you should always look at is how the sharps, the super smart money, prices risk. And when you're dealing with companies like CoreWeave or Nebius or Lambda, etc., that have to borrow a lot to fund these boxes, the smart money is trading what's called a credit default swap. Okay, this is default insurance and these default swaps are meant to insure the bondholders against a potential default. That risk spiked this week to about 953 basis points, which it doesn't matter what that number is, but as an imputed risk, it's about a 16% chance of a default in any given year. And over a five-year duration, what that math implies is about a 55% chance of a default. So, it's a coin flip whether they default or not. That's not what I'm saying. That's what the insurance market was saying about their debt. And I think that's something to look into because those guys, I think, are the smartest money in all of this.
So, why did they do this? I started to dig into it and here's a couple of charts that explains a little bit of what I learned. Okay, so the first thing is just a market check. You know, we've talked about this, but we have a problem in the United States, which is that the US is moving the risk-free rate higher and higher. Who is doing that? These are the central bankers. These are the bond vigilantes. These are the people that say because of inflation or other long-term risks that are not getting put out of the system, we need to get paid a lot more money to own the safest riskless asset. As that goes up, basic way to think about that is as the 10-year bond goes up, everything else goes up. And so this black line represents the average price that you have to pay for junk debt. And what you see is that as the 10-year went up and people are like, man, the risk-free rate's going up, the junkiest junk bonds need to pay more and more and more. And then the purple line here is what CoreWeave has to pay. And what you see is that it also has started to tick up and has moved up relatively violently. And so the question is why has it done that? Okay, so let's go to the next chart.
Michael is right that he is in the business of creating these boxes and then putting in contracts and GPUs, but he also needs to put money in those boxes. And the way that he puts the money in the box is he has to go out and borrow that money. So he goes to a lender and says, "Give me the money and I will pay you that back plus some interest." What you see here is what is inside of the box effectively. So the gray bar is how much money he's guaranteed to get into the box. These are all the deals he sold to all of his customers.
Yeah, these are contracts. Now, and it's important to note because I'll get to this in a second. It turns out that these contracts are fixed price. So meaning if what you could sell in the spot market goes up, you don't really generate that revenue because you've already pre-sold it at a fixed number. So, Michael creates the box. He gets a long-term contract, which is great because you have certainty around the revenues you're getting, but he sells that. Then he goes and has to finance it. And then some of that financing comes due. He's got some bonds that are due and some loans that are due. What this basically says is at the midpoint, he has to raise another $35 billion of debt to get all of the contracts that he signed financed, right? All the boxes financed and up and running. So he has about $35 billion of debt. He needs to raise another $35 billion of debt. But as you saw in the chart before, that's ticking up and it has nothing to do with him. It is because the broader market is essentially saying the risk-free rate goes up, everybody has to pay more because your spread above the risk-free rate has to track with it.
Okay. So today, across all the different pockets of money in which they have used to fund those boxes, their average interest rate that they pay is about 8.5%. The problem is that in this last little while, the sharps basically said, hold on, this is getting too close to the knife's edge. You're going to have to pay more interest. That's what I tweeted, which was just, you know, one of the sleeves of interest. This is the GPU loan DDTL 1.0 spiked to 15%. The problem is that could theoretically now be the rate that they have to pay for all of the future. And remember, half of it's financed, half of it is still unfinanced. Right now, these guys are in a pretty good place because they have about $78 billion of assets and only $35 billion of debt. So, they're well covered. So I think that, you know, this idea that they're at risk is not on the surface true, but the reality is that they have this problem which is they have extreme customer concentration. 75% of the revenue comes from three companies. Some of those companies are walking down what their revenue expectations are into the future.
So you have this situation now where you have to go out and borrow at a much higher rate. You have a bunch of debt you need to go fund the boxes and you have a fixed amount of revenue going into the boxes. So what is the trade or what is the setup? It's basically a coin flip now on the following idea. I think the market is saying that if they are able to finance this stuff at a reasonable rate and the life of the GPUs that they buy from Jensen are longer than what they think, they're going to be okay. But if the financing goes up and into that, you know, 10, 11, 12, 13, 14, 15% range, these guys are getting very, very, very close to not necessarily being able to cover all the obligations that they have. My team's estimate is that they're plus or minus about $5 billion away from that break-even point. So, I think that's why the CDS spiked, which then caused the bond yields to spike and caused the bonds themselves to sell off.
So in order of operations, number one, I think they've created this very novel structure that everybody else has copied with the boxes. Number two, they've sold these fixed contracts. That's super smart, guaranteed a bunch of revenue into the future. But we have this situation where as the risk-free rate goes up, their cost of borrowing goes up. That erodes the margin that they have, that then brings them close to this break-even point. That causes the CDS to react, which then causes the bond yields to react. That's the negative reflexive loop that they're in. So, they just have to find a way to break out of that. I don't think that they're in real risk. But, as we all know, this is sort of a confidence game and you need to have confidence that the broader market can support another $35 billion just from these guys. And I think that's what's going to get figured out over the next month.
All right, Ben. So, you look at this situation, you've been through a couple of bubbles before, maybe have a little PTSD or scar tissue, in fact. Um, and we saw CoreWeave bounce today, kind of hit a bottom, stock's up 1 or 2% right now after going down 10%. Is this acute? And then what does it mean for the broader AI trade, the AI bubble? Is there a bubble? And we'll get into Anthropic in a minute. Sacks.
Yeah. So, so I think that um, the first thing to understand is these businesses like CoreWeave, as uh, you know, Chamath kind of went through some of it, but they're Rube Goldberg financial machines. They're exceptionally complex. Um, so you know, we talked about, okay, GPU contracts and this, but he's got data center contracts, how long are those? And then there's, he's got to buy memory, like, and there's memory shortage and this and that. So, so it is really complex. The other thing, um, or the other interesting thing is, yes, GPUs, not only have they, they've been going up in duration and in price. So that's been like a big tailwind for him uh, as the owner of such things.
When you say duration, you mean the lifespan, the number of years you get value from that. It was three, four, five, now it's six, seven, eight. And there's a shortage, um, like a real shortage of GPUs with power and cooling and I kind of caveat that, right, like, which is what he has.
Uh, and this shortage is so bad, you know, I was speaking with Andy Jassy who runs Amazon yesterday and I said, yeah, like we're out of everything, you know, till 2028. He's like, "Oh, it's beyond 2028. Like, I don't think we get stuff back." Like, end of 2028, maybe. Uh, so everything else is sold out. So, he has the advantage of that he's got supply in a great shortage, which is extremely different than the internet bubble. The internet bubble, we didn't have enough demand because we had to build the internet. People had to get broadband. You know, you needed uh, all this stuff. People had to buy, you know, originally they had to get their browser, app, fries, all this kind of thing. There weren't enough consumers on the internet to absorb all the bandwidth that had gotten built out and they had a massive amount of debt, not unlike uh, we're building today, although not as big. Um, but the lack of demand killed it. We don't really have a lack of demand in AI. So I think the dynamics will be different. Uh, I do think like, for sure, if you get into a pathological debt situation, that can wreck anybody. Uh, it's why um, by the way, we're not invested in any of these uh, neoclouds either for that reason because that whole thing scares me having been through it. But I would just say it's pretty complicated uh, and it really depends on a huge number of assumptions in this very elaborate model that they have.
Ben, but let's just look. You and Marc were one of the pioneers, maybe the pioneer of the neocloud business. I mean, you may just tell this quick story because I want to ask the question.
LoudCloud kind of popularized this idea that you could build these clouds and service customers this way.
Yeah. But it's very interesting to me that you and Marc as the kind of progenitor uh, have passed on the whole space. So I want to know why.
Well, it's because of this. I mean, so it can end up being um, like a very dangerous arbitrage business where, you know, you can get upside down easily. And so if you look at LoudCloud just as an example, just here's a simple thing that happened to us in 1999. Bandwidth, bandwidth was $1,500 a megabit and you couldn't get, it was very hard to get it and so you had to get a long-term contract, three years. By 2001, it was $50 a megabit. So if you were holding bandwidth, you were, you just, you know, and you borrowed money to get it, you're dead. So that, you know, that kind of thing is so out of the control of the entrepreneur and so different than what we like to fund um, that, you know, it just, it scared me to death.
Now look, I think the core dynamic of AI has been working for CoreWeave though in terms of that, in that there's a massive shortage, not an overage of supply. Um, so those prices don't seem to, you know, token prices have gone down, but GPU prices have not. Uh, and so things are going up, you know, and by the way, data center space is going up in price because even labor to build data centers is hard. The politics are making it hard to build data centers. So the whole supply chain price is going up and demand is not subsiding and so those are very big tailwinds uh, for CoreWeave despite the fact that the debt markets kind of independent of them are tough.
All right Sacks, uh, here's your Polymarket. CoreWeave announces bankruptcy. That's a pretty aggressive uh, Polymarket. 15% chance at the end of '27, next year. 23% at the end of 2028. Seems a little far-fetched given the fact that they have a massive demand for their equipment as Ben pointed out.
Well, you can't look, this is dumb because like I think Michael explained it, like you have this opco propco setup. So CoreWeave can't go bankrupt. An asset-level vehicle for a data center or a buildout could theoretically go upside down, but that'll go into receivership and then just manage where you sell down the GPUs.
Yes, he explained in that clip he has each box independent of the next. So, not a great Polymarket, I think.
Uh, but well, it is great if you bet it the other way.
Yeah, exactly. Maybe some free money there to pick up. Sacks, let's level up the conversation here. Just outside of CoreWeave and the neoclouds, massive demand, token prices coming down, but token consumption going way up. And I think one of the silver linings here is it was a big question of how long these GPUs would last. Maybe they had three, four, five-year lifespan. Now people are saying, "Hey, these things will keep going into year six, seven, eight for inference alone." So what's your thought here on the AI trade, the bubble as it were? Do we need to take a little bit out? Do we need to stress test it? And is that what's going on here? Or is this uh, making you nervous? Hey, we're in year four or five of this bull run and that maybe it's coming to an end and we may hit the R-word. Yeah. Recession.
Here's the question, J-Cal, is you got this CoreWeave crash. Their bonds are being marked down to 80%, it's down 15 to 20% in the last few days in the stock market. Is this just market volatility or is this the beginning of something deeper and worse? Like you said, the popping of a bubble. Okay, that's the fundamental question. I would make the argument that this is just volatility, which you're going to get a lot of. Whenever you're underwriting to multi-trillion dollar outcomes in the future based on very rapid rates of growth, exponential rates of growth, the market's going to be super sensitive to any data points we have in the present. And so everything's going to be exaggerated and that's why you get these big swings. Now, again, that to me is the explanation of the volatility. I don't think that something fundamental has changed. So let's talk about the fundamentals. So first question there to unpack it is, has the demand changed? No, we know that the demand for compute just keeps growing by leaps and bounds. In fact, everyone is saying that they are compute constrained. I mean, you got the biggest model companies are saying they're compute constrained. Startups are saying it. I mean, they're asking their VCs, hey, can you help us get compute? I think you've got some VCs even trying to buy compute as basically a strategy for competitive differentiation so they can help their startup. So...
There was literally an accelerator that had bought excess compute and they were using it as a way to get people to apply for their accelerator.
Yeah. So we know the demand is off the charts right now. We're seeing other indicators. So for example, old GPUs like even the H100s or the A100s which are several generations old, they're still renting at premium prices right now. They were supposed to be fully depreciated and they're not. There's actually upside surprise there to the companies that are renting those old supposedly stale GPUs. So, we know the demand is off the charts. Okay. So, what's the next indicator of something deeper and problematic happening? Well, the next question you could ask, well, is there a glut of supply coming onto the market? So, we know the demand is huge, but maybe there's too much supply being stood up. Well, we know that's not the case because of the sheer difficulty of standing up this powered compute and we know it's not being brought onto the market too rapidly. First, you just have all the problems with atoms, building things in the physical world. That's hard enough. Elon basically has said, "Look, this is a really difficult problem. Even our rocket scientists find it challenging to stand up gigawatts of new powered compute." And then we have all the regulatory headwinds, right? Local communities are not racing to give out new entitlements around this. So if anything we believe that there's not a glut, it's the other way, that there's enforced scarcity.
So then the question becomes, well, is there some sort of execution problem with CoreWeave? You know, are they too slow in standing up their compute? Have their costs gone through the roof? Look, there's some indication that maybe their costs are a little bit higher, that maybe it's a little slower, but at least on a reputation basis, they are believed to be excellent at this game of standing up new compute. So then the question was, is there some sort of credit problem? You know, on the credit, like the founder Michael was saying with the boxes, you know, when you go to a lender to basically back the buildout of, let's say, a new data center, you're not relying on the unsecured credit of CoreWeave to make that loan. You're backed by the credit of the tenant who's entered into a five-year commitment. So, it could be a Microsoft, whatever. So the creditworthiness of that particular project, of that particular box, is going to depend more on the credit of the tenant than on the credit of Core. And then behind that you've got the GPUs themselves which, you know, it's basically asset-backed financing. The lender is secured by those GPUs. And we just talked about how if anything there's upside surprise on the depreciation cycle of these GPUs. So my impression is that there's not a deeper credit problem in terms of financing these projects. What happened though is the repricing is of CoreWeave's unsecured obligations. It's true that the market has discounted them by 20%. They're in distress territory. That has brought the implied coupon of those bonds from 9.6% to around 15%. But that does not increase the cost that CoreWeave is paying. CoreWeave is still paying their 9.6% coupon. It's just that the secondary market has repriced the value of those bonds to an implied coupon.
It changes the future debt.
Yes, it could definitely raise the costs of future debt, but I don't think they're funding these new boxes with unsecured corporate notes. I think they're funding them with asset-backed financing. And yes, the debt...
There's two things that go in the box. The contract goes in the box, the GPUs go in the box. So, you got two things and these are creditworthy organizations who pay their bills like Microsoft.
Yes. Now, if I were a lender on those projects though, I'd be looking really closely at the credit of who's the customer basically for that compute. Obviously, if it's Microsoft or Google or a couple other companies that feel really good, right, that may be a startup, I don't necessarily.
They have three customers that represent 75% of their revenue.
Yeah. And they're all investment grade like the big customers. So...
The thing I'll add to this is, you know, you explained quite clearly, uh, Sacks, hey, the GPUs are worth something, the data centers are worth something. Ben, you pointed out the power, the HVAC is worth something. The tokens are worth something. And then if you look at startups, uh, you know, which is where I spend all my time is the early-stage startups, they're crushing it in terms of raising capital, getting customers, and we've never seen revenue ramps like I'm seeing in startups today. And I think Ben, you'll probably back that up. The revenue ramp of startups today is distinctly different than the SaaS, you know, uh, triple, triple, triple, double, double. Now we're at like, hey, are you doubling every quarter or not? And then if you're not doubling every quarter, like what are you doing? Why are you not growing faster in this age of AI? So the startups feel particularly strong. So maybe this is just the market overall saying, hey, let's test this, you know, uh, and maybe there's some indigestion there. Or Ben, is it that the world is running out of money and people have placed their bets already? And then what would that say for the venture industrial complex of which you are, you know, a significant player at scale? And what would that say for the IPOs, the two biggest in the history of business and public markets, Anthropic and OpenAI? Are we running out of money to allocate to AI?
I don't think so. Um, you know, we've kind of never had companies that have grown this fast, gotten this big. And so, we've never asked that question before. We never said, or at least not in my lifetime, does the world have enough money to finance these things? Uh, which is a crazy question but like relevant. But I don't think for sure with respect to the Anthropic and the OpenAI IPOs, I think my belief is those are going to be fine. Like, look, the price, you know, will it be two trillion or will it be 1.75 trillion? I don't know, but I think...
$50 billion or $100 billion, whatever they raise, that's not a giant, that's a big number, but it's not an unprecedented number now because look, SpaceX just did it, right? Whatever you're holding in the equity markets, whatever you're holding, OpenAI and Anthropic are threats to that. Almost like there's almost nothing that you can hold in a portfolio that those two companies don't threaten.
And so I'm not worried at all about the demand for those IPOs. So you have to own those because they threaten every single company in the world because they're selling intelligence broadly and every company is based, Chamath, on intelligence.
Therefore, it's that disruptive.
Yeah, Chamath, you can underwrite it as a defensive hedge because I think Ben's right. It's like if you own a healthcare company and you've thrived on the opacity of the healthcare infrastructure, OpenAI is a threat to that. If you own a bunch of workflows that have been rented to people as SaaS, theoretically OpenAI and Anthropic are a threat to that. So at a minimum it is sort of defensively positioning your portfolio. So you kind of have to because there is not much other investable stuff in AI to be long AI other than those two companies and so they'll get the lion's share of the interest.
I think the question generally is if the bond market walks the 10-year up to 5.5 and 6%, which has nothing to do with AI. It has everything to do with debt to GDP and a bunch of other factors in broad-based Western economies. Any business model that thrives on a financing spread gets cornholed, any and every, all of them. It just, it will not matter when the 10-year's at 6%. It won't matter. Doesn't matter what you do. It doesn't matter what you claim to do, you're going to get run over. You're going to be roadkill. As long as we can keep that from, you know, happening, we're going to be fine. So, like, what's the most important way, I guess, post these midterms to keep the party going? You have to really start to focus on deficits. And you have to find a fair trade where the bond market backs off. And I think you can see it in the tape. Meaning if we start proposing huge spending programs, they're going to walk the 10-year up. That then has a negative cascade to everything. If however the posture becomes much more about keeping everything calm and like let's just tone things down and let's find the waste in the system and squeeze it all out, I think people will respond very favorably. So that's really where it's going to come down.
The last thing I will say is these are like Achilles' heels. Meaning like I think Sacks made an incredibly eloquent case, so did Ben, about all of the asset value that's getting built up. But just like the great warriors, you just slice the Achilles tendon and they just crumble to the knees. I just want to point out this is that thing. There is no other thing. Meaning all this other stuff is complete goodness. But the fact that you need to finance these things in a variable-rate model as a spread to the risk-free rate is the big problem in these businesses. And you need to essentially have Microsoft, Google, Meta, and Nvidia backstop all of this in a worst-case scenario because that's the only way you can withstand a one or two-year correction in this market.
I'll tell you the other big piece here that might be a bigger threat, Sacks, is the deflationary nature of this AI, this superintelligence rather movement. We talked last week about people decompiling Photoshop going to zero. Now this week, Hood Warfare came out. It's basically people are making platform-level games for five bucks. It's so deflationary. There's an ElevenLabs competitor that came out that's incredibly cheap. And then every single open-source model being hosted and Elon saying, "Hey, we'll just route you with our orchestration layer to the best model, open-source or not." How big of a headwind do you think that is, Sacks, to our industry, just the commodification and how rapidly things are just having 90% of the value removed from them? And is that going to stop or is it going to accelerate? It feels to me like the deflationary nature of this software AI superintelligence is unique and different than anything we've ever seen. People are just able to rip and ship code so fast. It makes me wonder like what is the margin of software in the future?
Well, we want everyone to be able to create software, especially bespoke software, which is really this new category, right? That is going to be a huge driver of productivity throughout the economy. I mean, it's not all just like zero-sum games or disruption. The value of these coding assistants is that now you can create software for highly bespoke use cases. Whereas software used to be created really just for the mass market. I mean, the reason why Photoshop's a successful product is there's a lot of graphic designers who need to use that product, and really the only software that could ever get created in the past was when there was a large potential customer base for that. Now we're getting all these cases where enterprises can create software just for their particular use cases. And in fact, in a way, that's what agents are, is that they're bespoke software programs to solve a particular task.
But if people build those in-house, Sacks, and they're based on open source, you don't need the other piece of software that it's replacing. So isn't that extremely deflationary?
Maybe there's some substitution away from established software. But I think the important point is just there's this vast new category of software being created. I mean, the amount of code that's being created now is orders of magnitude already bigger than it was before coding assistants. So again, people just tend to think in terms of these zero-sum games and who's going to be wiped out or eliminated. But the really important trend here is just that there's going to be a lot more software created in the world for a lot more of these bespoke use cases. Enterprises are now able to create software for a much broader array of purposes. There's companies that never would have been software companies before that are now creating their own software, and they're hiring coders basically to manage the process. By the way, I think this is a really important point around, remember, with the whole jobs apocalypse. The first job category that predictors of the apocalypse were saying would be eliminated were software coders, obviously, because...
Everybody became a developer, and now everybody's shipping code.
Yeah. Now we're seeing that actually demand for coders is increasing even though 95% of the code's written by coding assistants. And the reason for that, again, is, well, first of all, you still have that 5%, and that 5% is of a much bigger pie, and you still need someone who can look under the hood and manage the whole process, and they need to be somewhat technical and maintain it. I think this whole, you could say, new category of bespoke software created by the proliferation of coding assistants and agents and all of that is just, I think it's going to be just a huge driver of productivity throughout the economy. And is that broadly deflationary? Probably in a good way, because it means that we can do more with less, and we need to...
Be great for the country, right, that everybody is going to be more productive. Ben, but do you worry about our industry, the venture industry, and we have these great hits, and then the second they become a hit, somebody can decompile it, create a competitor and ship it very quickly. It feels distinctly different in this, you know, boom to previous ones. So do you think this is going to be a challenge for us to get DPI for our LPs? Is this going to be a challenge for the sustainability of great software franchises?
Ben, I can... Yeah. Look, I don't think so. Like, this has been the ongoing prediction starting with the SaaS apocalypse.
But I think that David's right, is that what's happening is software prices will definitely go down. But the amount of software is going way, way up. It's the Jevons paradox of software. And, you know, these companies end up doing other things more than just the software. So we had this on the internet. The internet, information is going to be free. That's it. All these industries are dead. But they kind of reemerged in a different way. And I think that that's very likely what's going to happen. So from a startup's point of view, you've got to evolve. And so, you know, ElevenLabs does many, many things to make their product better over the years since that example that you brought up. And they've got like licensing agreements, like Burt Reynolds will read you a book or this and that and the third. So they're doing more than just software because they can, because the software is easier to write. The model they're training on very, very nuanced cases, which is why, you know, movie dubbing is so amazing now, where it sounds like they're just acting in a different language. So there's more to it than just, you know, speech-to-text or this and that. And, you know, those... So I think the products are going to have to get way better, and the startup's products will have to get way better, which is amazing for everybody, and then that's where the value will be. But yeah, just like writing software is not going to have any more value than like publishing a magazine, creating massive competition.
Yeah, the moat will change. You know, you got to think about what are the moats in a business. Data moats are a big one. If you have data that other people don't have, if you then build a user base because your model is catering to a particular vertical, and now you're getting all those users and you're getting their feedback, maybe that becomes a, you know, a feedback loop. The feedback learning becomes a moat. A lot of startups are building businesses based on that model. The paradigmatic example is like a Harvey or something where they get all these law firms on board, so they then get access to their data and then their usage, and then they train their own models.
Yes. Get sharper each time. Go ahead.
And cheaper and more custom.
Yeah, I'll give you the ultimate moat. I think power will be the moat. I think that you can build the most fantastical things in the world, and you're going to see people on the dry docks basically trying to hitchhike to get power. And the reason is because we are so constipated in the United States. A, we're already behind, and we're in a massive energy deficit, an electron deficit. We are by 2050 about 1.4 terawatt hours short, which means about six Californias worth of electricity. That's their starting point. Then when you layer in, and that's with everything that we've planned to build being built on time and on budget, which we know is not going to happen. Then on top of that, you have all the load growth that theoretically happens when you actually have all these next abundant experiences. I made this statement this past week, and I'm just going to double down on it. I don't think you can work through the hyperscalers anymore because of this one issue. So let's just say you're a big mainline, you know, G-SIB bank, right? JP Morgan, Citibank. Could you imagine that the reason why you can't service your customers is because the underlying cloud that you use can't actually secure and grow enough power? And so back to the other moat that I think is really valuable is to own the land, the power, and the shell because it's such a constrained asset. Back to what Andy told you, Ben, it is so critical and it will stop the best experiences on a dime. So if you're a startup, I actually think the bigger problem is you'll go to these clouds, you'll be like, great, I'm ready to launch this whiz-bang product, and they're like, 'Suck it. We have no capacity for you.'
Yeah. Such a disaster. I very much agree with that last one.
By the way, what an incredible opportunity that's now been lost in the Middle East, where Saudi, UAE, Qatar, they were all massive producers of oil, able to do top-down planning, data centers, and now they have bombs going off blowing up airports. It's such a...
Without drone defense, you can't go there. Without drone defense, you can't go there.
Exactly. And drone defense isn't going to work because all one drone gets through and your data center is fried.
Well, I mean, can I make one last point on the whole data center thing, please?
So there's one metric that the more I think about it, the one metric I would really keep an eye on is payback period. To me, that's like the North Star metric here. So CoreWeave says that its payback period is 2.5 years. Their typical deal is 5 years. They pay back within 2.5 years. SpaceX, they pay back in roughly one year. That makes sense because I think that SpaceX is monetizing at about 50 billion per gigawatt and Core at about 20 billion per gigawatt. And the reason for that is because SpaceX is basically getting spot. You know, they're doing these deals that can be canceled by either side within 90 days. So they're basically getting spot minus 90. Whereas CoreWeave is signing up for 5-year commitments. So it's, you know, contracted way in advance, and they're kind of getting this contracted price. And what's happened, I think, over the past year is that spot has moved way up.
Because again of the scarcity, right? And the demand is so off the charts. So in any event, payback period is really critical, and as long as the payback periods are really short, I don't see how these companies can lose, or at least you'd have to be really incompetent to screw it up, right? Like you're making these big capital investments, but if you're getting your money back in one year or two and a half years, you know, that greatly reduces...
Like owning an Airbnb in Paris or something like that.
The payback period is so quick for these if you got your orders in early.
Yeah, and that means you're paying back the debt quickly, and so the debt's rolling over more quickly. It just reduces everyone's risk. Now, if that payback period starts taking longer and longer, then I get nervous, right? Because that magnifies the risk. It also means the economics aren't as good. And the question is, well, why would the payback period take longer? And it could happen for a bunch of reasons, right? Like if the demand goes down and so now the offtake's not as good, the spot price going down, or just there's execution problems, right? It takes you longer to get the capacity online. So, you know, the payback gets delayed. There's a lot of reasons why payback could take longer and longer. But as long as payback remains as short as it is today, to me, that would be like the one metric I would really keep an eye on. The other thing that the big offtakers will make you sign up for is what's called liquidated damages. There's really, really complicated language and penalties that are extreme about what happens when you can't service the data center. So I think that's another risk. There's been a couple of these guys that have lost, I'm not going to name who they are, but that have lost their investment-grade rating from the big boys because they just fucked up, Sacks, to your point, and couldn't manage the data centers because the complexity is going up. And the complexity goes up because the chips run hotter, there's more energy, there's more electricity, there's more... So all I'm saying is I think the sharps may be wrong, and they usually are wrong when they're buying these credit defaults. But, you know, when your expected value is a coin flip in a 5-year window, that's like scary town. I think that needs to get managed very precisely. I would just find every way possible to nip this in the bud if I was CoreWeave.
And then how do you think they can do that? How can they nip it in the bud?
I think that they have to cancel some of these contracts and move to spot. That's the simplest thing that they could do. If they could basically pay a penalty and get out, they should run the Excel right now on, let me just like take this gigawatt, put it on spot because you're talking about, as you said, a 20 billion spread.
But this is where Elon has a big advantage because Elon has independent sources of financing to finance that gigawatt of compute. He needs that 5-year contract to bank the financing to then build that capacity.
Well, the thing is, like, I think that Nvidia probably is okay with Core selling spot and not doing a multi-year offtake for a big hyperscaler or a foundational lab. So I would just run the math and try to figure out, because they've only built half the capacity that they've contracted for. So, you know, let's just say they built two out of the four gigawatts. They've got to figure out a way very quickly to just, because to your point, the spread between their fixed contracts and spot is so extreme that you're leaving 20 and 30 billion on the table, and so now you're within plus or minus 5 billion of violating a covenant on your debt. Don't be there.
Yeah. It would improve their economics a lot. Look, if they had a gigawatt of compute they could sell it spot, you're right, that'd be like net 30 billion.
Right to the bottom line.
Right to the bottom line. I think the challenge with that is the hardest people to get spot pricing from are the investment-grade customers. Like, those are the ones that won't do it, right?
Also, because they also have a war chest of money, they'll stand it up themselves if it's too expensive.
Yeah. This narrative could change a lot, right? If like spot becomes imperiled, then yeah, the guarantee contracts become great.
Yeah. I think we're capacity constrained enough through the entire pipeline. Like, you have to think Nvidia has done an incredible job. Okay. Because if you look one layer beyond Nvidia, all the packaging capacity is them. All the HBM capacity is mostly them. Like, even Google can't get cups for memory right now because Nvidia has clogged it all up. So they are in complete ball control here. And so it just creates the setup, I think, is that spot will remain highly elevated for a while.
Crazy moment in time. And we got a double bang this week on top of...
Sorry, Jason, just the last thing, but I'm telling you guys, you got to get long energy. I think startups need to find a way of like cobbling together if you don't have access to electricity. You cannot go through the hyperscalers is my prognostication.
Yeah. Stop the war in the Middle East. It solves a lot of problems right off the bat. If CoreWeave wasn't enough, AI sector got double-banged on Wednesday after Anthropic investor day numbers got a mixed reaction. Anthropic is planning on going public around Thanksgiving. Polymarket says now 74% chance they go public this year, down from 95% in early September when they said everybody was going to die from their software. On Wednesday, the company presented the potential, I mean, you can't make this stuff up, presented potential IPO investors at their headquarters in San Francisco. Now, this isn't the bugged headquarters of OpenAI. This is, they swept the room for this, but we still have the data. Q3 free revenue, $16.8 billion. Think about that, gentlemen. Over $5 billion a month already for Anthropic. Net revenue retention was 900%. That means customers spent nine times more than last year. Pretty good, huh, Sacks, on a SaaS front. They also said they are free cash flow positive. Adjusted gross margin 85%, adjusted operating margin 11%. No word on how the adjustments were calculated. But here's the big one. ARR estimates range from 70 billion, which would basically be flat since July, which is a bad sign, to over 100 billion. So there is some hand-wringing about what numbers are correct here. They did not disclose these numbers. These are just secondhand estimates by investors who might be a little leaky. Obviously, Anthropic is targeting a ginormous, unprecedented valuation of two trillion, growing violently, not growing slowly. Go ahead, Cham, you had a question.
No, I just said, Ben, is Andreessen long one of the foundation model companies, like one of the two big ones?
We have a lot more stock on OpenAI. But I would say, you know, philosophically, we're long both of them. I think...
You're long both of them, which is kind of a strange thing. Now, Ben, you've gotten so big, you consistently have bets on the number one and number two player. How is that working out in the market?
Well, now we, I mean, I would say that there are many investors in both of those things. So I think, look, in venture, we call it venture capital, but venture capital has subsumed a huge part of what used to be the public markets. And I would consider both OpenAI and Anthropic to be in that category where they're not really venture capital, where you're worried about your venture capitalist being invested in your competitor because they're gigantic. You know, they're not A-round bound companies anymore. So that part of the market, I think people, you know, when you're raising by the, you know, tens of billions of dollars, you don't care where the money is as long as it's green. Like they're just taking...
That's what used to be mezzanine financing, pre-IPO financing. Yes. There's less hand-wringing about the conflicts there.
Yeah. I wouldn't even call it mezzanine financing at that level. I think you know what this is, just like we did a lot of regulatory moves in the late 90s and early 2000s, which really made the public markets much less attractive for companies, and the private markets grew to absorb that business, which has been, I think, very bad for America. It's increased the wealth gap and so forth, but it is what it is. And so I wouldn't consider that that's very different than like investing in two A-round companies doing the same thing. I still think that's the over thing is distinctly different than Anthropic, OpenAI at two trillion now.
One is a reaction to the other, in fact, right? Anthropic was a reaction to OpenAI. Let's call it what it is, rug-pulling Elon on it being a nonprofit and becoming a commercial enterprise. We'll leave that on the side for now. What are your thoughts on this Anthropic IPO?
Well, look, I think that you hit the thing that's kind of causing the consternation, which is, okay, growth has slowed from Q2 to Q3 by a lot in terms of revenue growth, and then we don't know what the ARR or the recurring revenue number is, and so people have questions about how fast the thing is growing. Having said that, 16 billion, 16.8 billion in the quarter, how long has Anthropic been selling stuff? You know, three years.
I mean, like, it's just so absurd how good this thing is. So I think the IPO will be fine. Like, whether it's, you know, you want to be in at 2 trillion or 1.9 trillion or 2.3 trillion, I think that's what a lot of the debate is about. And then, you know, anytime there's negative news on the big labs, then everybody in the supply chain, you know, gets hit with that. And so that's what's going on now. I, you know, like, I think big picture, it's a very important company and it's got a very big IPO.
30 times price-to-sales ratio, Sacks, and this headwind of open source and enterprises moving to that, most businesses don't need to solve the last seven math problems in the world, could be slowing. We could have Anthropic's revenues slowing. Let's say they are slowing. What do you think happens to this IPO and the broader AI trade? Now, we have two things as examples of AI trade headwinds, superintelligence headwinds, whatever's happening at CoreWeave and whatever's happening at Anthropic.
Well, look, you had this investor day at Anthropic the other day, and I think some of these numbers that are coming out are kind of leaking from that. Maybe, we don't know. We don't know what's true or not. I think the participants had to sign NDA, so I don't know if you can completely trust what's floating around X here. I think we'll find out in due course. I mean, if this company is IPOing next month, we'll find out the actual numbers. I would say that the, let's just say the body language coming out of the investor day was pretty strong. At least from what I've heard, I think the investors like what they heard. These are like big public market investors. Who knows? I mean, everyone's kind of talking their book, so it's hard to know exactly what's true. But look, I generally think that Anthropic is a strong business. I understand that there are some risks to it. It's not like it's completely risk-free, but it's a pretty young business, so you'd expect that. But overall, I think it is set up to have a strong IPO. And look, wearing my hat as an investor, I think it's a very impressive company, which is all the more reason why I find their attempts to kneecap open source through their incessant fear-mongering campaigns and regulatory capture to be so distasteful, is they don't need to be doing that. They're a very successful company. They've got a very bright future. I just find it kind of offensive that they keep trying to do that. There were two examples of it just in the last week. Do you guys want to talk about these?
