Latent Space: The AI Engineer Podcast
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.
01:17:45 · Shawn Wang, Jamin Ball
[01:17:45] S1: to educate people on the three statements of accounting. [01:17:48] S0: Yeah. But hey, think a lot of people look at the income statement, the P and L, but the reality is there's a lot to learn from the balance sheet and the cash flow statement too. And so this was more of a, hey. As as just someone who's intellectually curious, I mean, Anthropic is is a really important company to understand. I think if the Anthropic s one came out and the financial profile that was pictured was doomy, and it didn't look like a good business, I think we have a lot to be worried about. Yeah. Because if they're not delivering profits and high ROI, what does that mean for everyone downstream of them? Like, that's... It's... I think it's really important to understand the Anthropic P and L. But what I understood from the Anthropic P and L... Let me just rip through these really quickly. Here's what you're seeing about their gross margins. Lots of leverage in the gross margins. They're improving rapidly. [01:18:38] S1: Which one one nuance on this is this is the half that is not through CloudPartners. [01:18:43] S0: Exactly. This this... No. This is just the GAAP gross margin. Right. Okay. That... [01:18:48] S1: Okay. I I don't know. I I read something about like how... Obviously, Cloud Partner margin would not go into gross margin at all. Yeah. That's 50% of How [01:18:57] S0: many account, I believe, is a lot of the cost that they pay out the rev share is in sales and marketing Yeah. Yeah. Which is below the line, which I which I think what you're By
01:18:57 · Jamin Ball, Shawn Wang
[01:18:57] S0: many account, I believe, is a lot of the cost that they pay out the rev share is in sales and marketing Yeah. Yeah. Which is below the line, which I which I think what you're By [01:19:05] S1: the way, $3,000,000,000 of sales and marketing. [01:19:06] S0: I think it's like 40 something percent of the revenue comes from cloud partners. [01:19:10] S1: It's it's