Latent Space: The AI Engineer Podcast
01:11:03 · Jamin Ball
[01:11:03] S0: do it. Reasonable reasons why, hey, they were converts. But the conversion price was at a much lower valuation relative to what it is today. And so when you look at the balance balance sheet have to balance. You have assets equal equity plus liabilities. It has to balance. And so when you raise a convert, you get cash. Your assets go up. Well, if your balance sheet's going to have to balance, your liabilities also have to go up. And it makes sense. A convert is a promise for shares in exchange for cash. And so Anthropic took on that liability. And at the time, the liability matched the cash raised. Now what's happened to Anthropic's valuation since 2023 and 2020 It's gone way up. And so now what happens is the dollar value of your liability, because you promised shares at a price, the dollar value of that liability has skyrocketed because the valuation of the business has gone up. What does that mean? Okay. Now the liability looks big. It looks like $108,000,000,000 debt that Anthropic raised. The reality is this, they didn't raise $108,000,000,000 of debt. There was about $11,000,000,000 in those combined convertible notes. About $6,000,000,000 has already been... No. $5,000,000,000 has been converted to equity. There's 6,000,000,000 outstanding. The market value of that 6,000,000,000 is 108,000,000,000 because the company's value has appreciated meaningfully. And so there's this debate of like, well, they have 108,000,000,000 of debt on the balance sheet. They haven't raised 141. They've raised 141 plus 108. That debate is just misguided. There is no debt on the balance sheet, and the 11,000,000,000 of converts is inclusive in the 141,000,000,000 of total capital raised. And so debate one of Well, have they already generated?
01:12:55 · Shawn Wang, Jamin Ball
[01:12:55] S1: Say good job summarizing this. [01:12:56] S0: Yeah. But it actually goes deeper. Yes. That's just the balance sheet. Okay. Now let's look at the income statement, the P and L. They have an operating profit. You could say, Great, GAAP operating profit. But what comes below operating profit? Net income. Someone could say, well, in the first six months of 2026, they had negative $80,000,000,000 of net income. So you could say, and this is a debate, this is what people are saying, again, it's very misguided, they're losing $80,000,000,000 It's true. What a terrible business. Technically, by GAAP accounting, is. Okay, let's go back. And I'm gonna go back to the balance sheet. The liability has gone way up. That liability is now 108,000,000,000. Okay? Let's think about the balance sheet. Assets equals liabilities plus equity. As liabilities have gone up, two things have to happen. Either your assets have to go down or your equity has to go down. Well, your assets haven't gone down. That means your equity, the value of your equity has to go down. This is where it might get a little complex. But how the three statements link is Yeah. [01:14:04] S1: People can take accounting one zero one. [01:14:05] S0: Net income on the P and L flows to retained earnings on the equity value of your balance sheet. And so what has to happen as that liability has gone up, retained earnings has to go down by the same amount, which basically means net income has to go down by the same amount because net income on the P and L flows to retained earnings on the balance sheet.
01:14:05 · Jamin Ball, Shawn Wang
[01:14:05] S0: Net income on the P and L flows to retained earnings on the equity value of your balance sheet. And so what has to happen as that liability has gone up, retained earnings has to go down by the same amount, which basically means net income has to go down by the same amount because net income on the P and L flows to retained earnings on the balance sheet. [01:14:27] S1: It's all mathematically linked. You can't break it.
01:14:29 · Jamin Ball
[01:14:29] S0: Yeah. It's all mathematically linked. You can't break it. But what's happened is in order for those statements to link and for those statements to tie, you need a huge decrease in value on your income statement. And happens is, guess what? Anthropic's value has just skyrocketed recently. They've raised big rounds over the last nine months. And so as those converts have appreciated in value, the value that those notes have appreciated shows up as a loss on the P and L. And of the $81,000,000,000 of loss in net income on the first six months of this year, 72,000,000,000 is from a series of converts for Anthropic, for AWS and Google, and 9,000,000,000 is for a separate set of safes and notes. And so 100% of the loss in the first six months is just the value appreciation of their converts. If Anthropic never issued converts to Amazon and Google, just did straight equity, that loss wouldn't be there. And so it's kind of one of these like, technically from GAAP accounting, they do show an $80,000,000,000 net loss. Do I view that as an accurate representation of the business? No. Because the reality is 100% of that loss is just the appreciation of their equity, which everyone would say is a good thing. And as those notes convert to equity, those go away because you no longer have this dynamic of your liability going up as your stock price goes up, which means your net income has to go down over here. So, you know, all the financial statements tick and tie. And I, yeah, sorry if that got too, like, financial.
01:16:09 · Shawn Wang, Jamin Ball
[01:16:09] S1: That was a really good recap of the discussion. That should be a definitive answer for anyone who has come across that topic. There's another discussion about the circular financing Yeah. Google Google and Amazon. We don't have to go into that. I mean, I think that is small in comparison to the numbers we're talking about today. Yeah. And in general, like, you know, book value accounting is not that relevant Mhmm. Compared to overall enterprise value. Mhmm. And and [01:16:34] S0: maybe one other thing related to I think there are lot of people that say, Okay, well, the only reason the liability has gone up is because the value has gone up. Does that mean that Anthropic issued shares today? And Amazon did they and Google $108,000,000,000 worth of value, but did they give them those shares at the price from four years ago? Did they just give them shares at a huge discount? It's like, no, that didn't happen. What happened is they raised that money years ago in normal financings like a normal startup would, and over time, it's just appreciated in value. [01:17:04] S1: So so, you know, I I think a lot of people, if... They they're just not financially educated to that level because they never had that exposure. So Yeah. It is what it is. It's... You're just educating. What was the second debate that you were referring to? You said you had two debates. [01:17:16] S0: Oh, those related. Yeah. So it it was it [01:17:18] S1: was the other one.
01:17:18 · Shawn Wang, Jamin Ball
[01:17:18] S1: was the other one. [01:17:18] S0: The balance sheet. Oh, wow. Have they raised more debt? And then it was the income statement. Are they actually losing money? [01:17:23] S1: As an investor, why do you get involved in these kinds of [01:17:27] S0: Oh, this is more of like... I mean, I'm You're just having fun. Yeah. I think, look, Altimeter is a firm. We do venture investing, growth investing, and public investing. And I spend a lot of my time on the venture investing in early stage. However, I consider myself like a student of finance, and Anthropic is such an iconic company. You shouldn't have [01:17:45] S1: to educate people on the three statements of accounting.