Latent Space: The AI Engineer Podcast
00:10:07 · Jamin Ball
[00:10:07] S0: Once you go public... Actually, let me take a step back. If you want to raise debt or if you want someone else to raise debt, not on your behalf, but like as a Neo Cloud, a Neo Cloud might want to raise debt to build a data center for Anthropic to to use. Debt providers are gonna look at Anthropic, and they're gonna underwrite Anthropic's credit worthiness. And how it works is they'll go, they'll say, hey. We're gonna syndicate how many billions of dollars of debt for you, Anthropic, or via a Neo Cloud for you. But we're gonna need we're gonna need, like, full open kimono on your financials. We're gonna need to know exactly how this business is doing so that we can underwrite you. And then everyone we syndicate the debt to on the back end, they also need to see it. And I'd say historically, companies have just been hesitant to go full open kimono with their financials to the debt and credit markets because they don't want them to be fully public. But if you want to be rated by the by the rating agencies who basically... They'll give you a credit rating. Investment grade is the highest. Your credit rating will kind of impact the rate with which you can raise debt at. And the higher your credit rating, the lower the rate that you'll receive. But you, you know, have to be open kimono with your financials. So going public is a great way for companies to basically... You're gonna get rated. I think SpaceX very famously got rated very quickly after going public. You can tap into... Yeah. Arguably too. I mean, there there was a lot of people who said it was, hey. It was too fast. They need to season more as a public company.
00:11:36 · Shawn Wang, Jamin Ball
[00:11:36] S1: And and add it to the S and P 500 too. Something like that? [00:11:39] S0: Yeah. New rules. Exactly. And so I I think, hey. A lot of these companies, they will be capital intensive, whether it's for training or building out compute clusters, and you wanna tap into the credit markets. And I think if you want to tap into the credit and debt markets, you can do that much more efficiently as a public company. Sure. And so again, it's probably a confluence of all those things added up to, hey, why go public? I think there's also just if you ask these executive teams and management teams, hey, they want the everyday American to be able to participate in the equity upside of these companies. [00:12:12] S1: I was gonna bring that up. Yeah. Yeah. To including giving shares to everyone. [00:12:15] S0: Totally. Totally. And hey, the reality is is private markets are more of like a cabal. It's a small subset of the population, either qualified purchasers or accredited investors or or, you know, big funds and pensions and endowments get to participate in the equity appreciation of these businesses. But, you know, your doctors and dentists and your everyday American doesn't, and there is just something that doesn't doesn't feel right about that. Right? [00:12:38] S1: Like, everyone Straight up, you will get social unrest. Right? And straight up, you'll get you'll get voted regulation because, like, well, those guys have their AI, and I'm gonna vote against it. I have my vote. That's right. [00:12:48] S0: That's right.
00:12:48 · Jamin Ball, Shawn Wang
[00:12:48] S0: That's right. [00:12:49] S1: That's right. And so, like, that that is, like, a really interesting governing mechanism of democracy versus capitalism Yeah. Where, like, capitalism encourages centralization and democracy encourages decentralization somewhat. Anyway, so there... There's all that. I think it's very, very valid. I'll point out for people who don't know about capital structure that equity is is junior to debt. Yeah. And so it's nice to have 2,000,000,000,000 in [00:13:10] S0: in junior Yeah. Exactly. [00:13:13] S1: In your enterprise value. [00:13:14] S0: Right? Exactly. [00:13:14] S1: Exactly. That's like, well, that... That's that's that's public. And I think part of that also, I'll I'll throw it in the way now, which is a little bit more advanced than than people know, is interest rates are spiking Mhmm. For for for data center debts globally. Right? Like, is there a source to look that kind of stuff up? Is it just Bloomberg? Or is Yeah. [00:13:36] S0: I I mean, mean, there's [00:13:37] S1: just charts that people tweet around. But [00:13:39] S0: Most of these big debt deals will price, and they'll be, you know, like an interest rate, an OID. You know, there'll be a bunch of things associated, like, with the price, and, like, oftentimes, those will be public once they've priced. But, yeah, rates are going up. Risk free rates are going up. The Fed paused. You're... Decided not to hike yesterday or earlier this week. I don't know if that's necessarily a reason to go public. But
00:13:39 · Jamin Ball, Shawn Wang
[00:13:39] S0: Most of these big debt deals will price, and they'll be, you know, like an interest rate, an OID. You know, there'll be a bunch of things associated, like, with the price, and, like, oftentimes, those will be public once they've priced. But, yeah, rates are going up. Risk free rates are going up. The Fed paused. You're... Decided not to hike yesterday or earlier this week. I don't know if that's necessarily a reason to go public. But [00:14:07] S1: It's part of the why now. If if if it does help with that, that if my debt went from, like, I don't know, 3% to five percent, that is billions of dollars. Yeah. Yeah. And if I can keep a lid on that, that's very important to me. [00:14:21] S0: Yeah. I mean, a lot a lot of the data center debt deals now are are getting done over 10%. Yep. And so it's it's getting it's getting expensive. [00:14:28] S1: Okay. It's getting expensive. So... And then the other... That's the other part of this discussion, which is the ROI on a data center. Mhmm. Right? Because that... There there are a lot of AI skeptics Yeah. Who are like, this is the biggest build out in human history. Yeah. And we are throwing money after this illusory dream of AI. [00:14:47] S0: Yes. [00:14:47] S1: Then on the other side, the AI pro people are saying, well, your payback period is one year. Yeah. Yeah. Why is there such a huge difference? This
00:14:47 · Shawn Wang, Jamin Ball
[00:14:47] S1: Then on the other side, the AI pro people are saying, well, your payback period is one year. Yeah. Yeah. Why is there such a huge difference? This [00:14:56] S0: was kind of the best thing about the Anthropic S1, which is a lot of the metrics that were leaking where your ARR, you're this or you're that, but you didn't really get to see a lot of below the line. [00:15:04] S1: That's not ROI. [00:15:05] S0: Yeah. You didn't get to see the cash. How much are they burning? It's not profit. Are they profitable? Are they not? And that I think was one of the biggest surprises of the S1. Here's a business that showed 85% gross margins, over 20% free cash flow margins, 8% GAAP operating margins. And so even on a Yes. GAAP basis highly profitable. And maybe my my favorite stat of the whole s one was a $141,000,000,000 of capital raised to date. That's inclusive of equity, converts, and safes, and a $134,000,000,000 Cash in balance today. [00:15:42] S1: And so Cash and cash equivalents. But...
00:15:42 · Shawn Wang, Jamin Ball
[00:15:42] S1: And so Cash and cash equivalents. But... [00:15:44] S0: Yes. Exactly. And so you think, okay. Well, you've you've raised this much. You have this much in the bank. That means you've burned $7,000,000,000 to get to, you know, the q three numbers that aren't in the s one, but that were kind of like broadly reported a few weeks ago. $16,800,000,000 of quarterly revenue off of $7,000,000,000 of lifetime burn, which... And the burn we should we should get into because like that was a a huge debate on like, well, it looks like they did raise debt or are they really profitable? What is this net loss on the P and L? There's... I'd say lots of [00:16:17] S1: Yeah. [00:16:18] S0: So lots of things out in the world that aren't fully true. [00:16:20] S1: That is important. I do wanna cover it. Let's... That that... There's a little bit more in the weeds than than than at the start of this conversation. Yes. But, like, that overall efficiency is by far, if you've been following the relative fates of... Let's call it SpaceX Anthropic OpenAI Have you heard? The the ones that are going public, they are the most efficient lab in the world Yeah. By by, like, order of magnitude. [00:16:43] S0: Yeah. Totally.