Zone media, I'm better off line and this is ed Zetron.

Wait, that's right, folks.

We're here for part two of our multi part series about the final casualty of the incertification process the financial markets.

You see, we're in a world where because companies can no longer stimulate growth by just script mining their individual and business users, they've now resorted to just lying.

And lying is an interesting word because they will claim we're not lying, we used words to vaguely avoid telling you the truth, or we were technically true in what we say.

There are various kinds of lies that don't have to just be I told you something that was not categorically yes or no force.

I mean, you've spoken to other people, but they will say this for legal purposes.

So fine, it's not technically lying, it's just bullshit.

But I think it's important to give you some examples and to talk about how analyst in the media simply allowed these lights to propagate unchecked.

Let me set the scene.

Our story begins on September tenth, twenty twenty five.

I was for some reason in Los Angeles that I can't remember.

Maybe a concert, maybe an interview.

Truly don't know.

Oracle announced its unfillable, unpayable, three hundred billion dollar deal with open AI, which they didn't have the capacity to serve, and open a I didn't have the cash to pay them, and this led to a thirty percent or more bump in stock price.

Analysts who should extensibly be able to count, called it momentous and said they were in shock.

On September twenty second, twenty twenty five, CEO Saffracats stepped down.

She stepped down from oraclen.

Nobody seemed to think that was weird or suspicious or worrying.

This was this was meant to be the beginning of the AI like boom too.

I mean, we kind of really in the AI bool, but this was meant to be the even more bigger one, right, Why would you step down?

Why would you step down?

Why would you step down?

And then have two guys like two different They have co CEOs.

Very sorry to my friend Jim, but co CEOs don't usually do well.

Look at BlackBerry.

But anyway, two months after that, Oracle stock was down forty percent, with investors worried about Oracle's growing capex, which is surprising.

I suppose if you didn't think about how Oracle would build the data centers to serve the three hundred billion dollar deal.

A makes me feel insane when I say these things out how loud, But just to be clear, anybody who traded on that got burned.

Now another thing happened on September twenty second, twenty twenty five, in Vidio announced what they called a strategic partnership to invest up to one hundred billion dollars and build ten gigawads of data centers with open Ai, with the first to gigawatt to be deployed in the second half of twenty twenty six.

Just a few questions from me personally, where would the data centers go, How would open Ai afford to build them?

How would open Ai build a gigawa in data centers in less than a year?

Don't ask questions.

Pig back in your cage now.

In video stock bumped from one hundred and seventy five point three to one hundred and eighty one dollars in the space of a day.

Said they're very normally moving on and the media wrote about the story as if the deal was done, with CNBC claiming that and I quote the initial ten billion dollar tranch was expected to close within a month or so once the transaction had been finalized.

I read at least ten stories that said in Video had invested one hundred billion dollars in open Ai.

Analysts would go on to say that in Video was locking in open Ai and I quote again to remain the backbone of the next gen AI infrastructure, and that demand for in video GPUs is effectively baked into the development of frontier AI models, and that the deal, the partnership between the two companies and Validate did in Vidia's long term growth numbers with so much volume and compute capacity.

Others would say that in Video was enabling open Ai to meet surging demand.

Three analysts, rask Gone at Bernstein Laurier, DA Davidson, and Wagner at Aaptors Capital all raised circular deal concerns, but they were in the minority, and those concerns were still often buried under buoyant optimism around the prospects of the company, and nobody just fucking saying the words, Hey, no one could afford any of the Oracle can't afford to build it, they don't have the capacity, they ust can't get paid by open Ai.

Open Ai doesn't have the money.

But in Vidia, this deal also doesn't make sense.

You know.

It feels like open ai is just promising everyone's stuff they can't afford.

All of these things seemed like very obvious questions, but people just kind of clapped their hands and went, fuck, yeah, we're doing Ai even more now.

But then there was this other thing about the Nvidia deal.

It's this quincy teeny weeny quincy little problem one little pro everyone about the Invidia deal.

The deal that everyone said was done.

It was a letter of intent.

It said so in the announcement and on Invidia's November runnings it said that it had entered into a letter of intent with an opportunity to invest in open Ai.

It turns out the deal didn't exist, and everybody fell for him.

Invidia hasn't sent a diamond, likely won't.

A letter of intent is also known as the concept of a plan.

A little over two weeks later, on October first, twenty twenty five, Reuters reported that Samsung and sk Heinex had signed letters of intent to supply memory chips for open AI's data centers, with South Korea's Presidential Office saying that said chip demand was expected to reach nine hundred thousand wafers a month, with and I quote much of that from Samsung and esk Heinex, which was quickly extrapolated to meet around forty percent of global dram outpum stocks in both companies to quote Reuter's Sword, with Samsung climbing four percent and sk Heinex more than twelve percent to an all time high.

Analyst Jeff Kim KB Securities said that and I quote, there have been worries about high bandwidth memory prices falling next year on intensifying competition, but such worries will now be easily resolved by the strategic partnership, adding that since Stargate is a key project led by President Trump, wrong lie, there also is a possibility that partnership will have a positive impact on South Korea's trade negotiations with the US, which is just to be clear, total and utter bollocks.

It's wank, it's scrap, it's nonsense, boop them above all the technical terms.

Donald Trump is not leading Stargate.

Stargate is a name used to refer to data centers built by open Ai, by which I mean other people building them for open Ai.

KB Securities is around forty three billion dollars of assets under management.

This is the level of analysis you get from these analysts.

This is how much they know.

There are people that study JoJo's bizarre adventure that have more economic analysis than any of these fucking people.

Most Star Wars fans who have just memorized all the names of the glop shittos of the world have better analysis than this.

But nevertheless, you'd think, right that these companies have made all this noise, and they've talked about this stuff, the Presidential Office all involved, you think we'd be able to get a whiff of that on their earning scores, right well.

On I sk Hihenex's October twenty ninth, twenty twenty five earning score.

Weeks after the announcement, it's CEO Kim Wu Yun was asked a question about high bandwidth memory growth by Eskkim from Daiwa Securities and I quote, so this is this is SKKM asking the question.

Thank you very much for taking my question.

It is on demand now.

There have been a series of announcements of GPU and a six supply cooperation between big techs and AI companies, fueling expectations of further AI market growth.

Then, against this back drop, what is the company's outlook on high bend with memory demand as well as a broadening of the customer base, es sk Heinex.

Thank you for the question.

Now, with upward adjustment in big text CAPEX and increasing investment by AI companies, the high bandwidth memory market, even by a conservative vestmer, will keep growing at an average of over thirty percent for the next five years.

I will point to our recent letter of intent with open Ai for large scale DRAM supply as an example of the very strong demand for AI as well as the need to secure AI memory based on HBM more than anything else went developing AI technology.

That is it.

That is the only mention of open AI.

That's it.

No other mentions otherwise, sk Heinex has not added any guidance that would suggest that it's DRAM sales will spike beyond overall growth where it's already grown because everyone's running out of ramthanks to fucking AI.

Other than mentioning that it had an I quote completed year twenty twenty six supply discussions with key customers, there is no mention of open AI in any earning's presentation.

Now You may think there were two companies.

You said two company names.

There were Samsung as well.

Right well.

On Samsung's October thirtieth, twenty twenty five earning school Samsung mentioned the term d RAM eighteen times and neither mentioned open AI nor any letters of intent of any kind.

In its Q three twenty twenty five earnings presentation, Samsung mentions it will a quote prioritize the expansion of high bandwidth memory four business with differentiate performance to address increasing AI demand.

Great place to mention open AI.

Right, yeah, that would be if the money existed and they were gonna do anything Now, analysts do not appear to have noticed the lack of revenue from an apparent deal for forty percent of the world's RAM.

Oh well, Pobody's perfect right.

My frustration, you hear in my voice is that I'm a guy with a Google doc.

I'm not a financial analyst, but I appeared to be able to do what they're doing because I'm able to fucking read a Both Samsung and s k Heinez's stocks have continued to write since, and you'd be forgiven for thinking this deal was something to do with it, even though it was not.

But silly season was not yet over, however, and on October fifth, twenty twenty five, AMD announced that it had entered a multi year, multi generation agreement with open Ai to build six goddamn gigawads of data centers, with the first one gig what deployment said to begin in the second half of twenty twenty six, calling the agreement definitive with terms that allowed open ai to buy up to ten percent of AMD stock, festing over specific milestones that started with the first giga what of data center development, said data centers would use AMDs yet to be released four to fifty GPUs.

The deal would per reuters bring in tens of billions of dollars of revenue.

Now, I know, hate to be an asshole, right, I know, I'm always on this shit, right Yeah?

Where would those data centers go?

How much?

How much would they cost?

How would open Ai pay for them?

Would the jips be ready in time?

Silence?

Well, how dare you ask questions?

How dare you?

Why are you asking questions?

Number?

Go up?

Number go up?

Look look at number?

Go up.

AMD shares searched by thirty four percent, with the analyst Dan Ives of Webbush, who appears to dress like the San Diego Padres Didy connect Jerseys, saying that this was a major evaluation moment for AMD.

As in the side, I've said that in video would benefit from the meta verse in twenty twenty one, and told CBS News in November on November twenty second, twenty twenty one, that and I quote, the metaverse was real and that Wall Street was looking for winners, were they dan?

Now one more thing, that AMD's November earnings a month after that announcement might be a barn burner full of remaining performance obligations from Open AI.

Things that Open appaying them moost tens of billions of dollars of revenues right.

In fact, CEO Lisa Sun who said that AMD expected this partnership will significantly accelerated Stata Center AI business and with the potential to generate well over one hundred billion dollars in revenue over the next few years in the announcement, and here's how AMD's ten Q filing referred to it, and I quote.

As of September twenty seventh, twenty twenty five, the Aggagut transaction price allocated to remaining performance applications on the contracts with an original expected duration of more than one year.

It was two hundred and seventy nine million dollars, of which one hundred and thirty nine million dollars is expected to be recognized in the next twelve months.

The revenue allocated to remaining performance applications does not include amounts whichever original expected duration of one year or less.

Now, I don't know about you.

I did not I didn't do economics in school, didn't do anythin like that, didn't do well at maths in school.

But two hundred and seventy nine million dollars seems lower than over one hundred billion dollars.

So I guess just just no revenue from open AI, no revenue of any kind.

I guess.

Now, AMD did raise guidance by thirty five percent of the next five years, and they're trailing.

Twelve month revenue is thirty two billion dollars.

Tens of billions of dollars would surely lead to more than a thirty five percent boost, because that would be like eleven billion.

That's just eleven billion dollars.

That's a lot less.

That's a lot less than one hundred billion dollars.

I don't know guess all that was for nothing.

No follow up from the media, no questions from analysts, just the shrug and we all move on.

They were at ces.

Greg Brockman came on AMD's Lisa Sue said something about Yachta flops, which really just pissed me off to think about.

Still nothing anyway.

AMD stock is now down from a high of two hundred and fifty nine bucks at the end of October to around let's see md stocks understand about two hundred and thirty one bucks right now.

Everybody who traded in based on an analyst and media comments got fucked.

Now let's go to my favor them, and that's a little company named Broadcom.

So back on September fifth, Broadcom send and it's earning school that it had a ten billion dollar order from a mysterious customer, which analysts quickly assumed was open Ai, leading to Broadcom stock probably nine percent and gradually increasing to a high of a three hundred and sixty nine dollars on September tenth, before declining a little until October thirteenth, when Broadcom announced a ridiculous ten gigawa deal with open Ai, claiming that it would deploy ten gigawats of open Ai designed chips, with the first ranks to deploy the second half of twenty twenty six and the entire deployment completed by the end of twenty twenty ninth.

So three fucking years for ten fucking gigawatts.

Just to give you an idea, it's about two and a half years a gigawat right now.

And that's for open Ai slush fun projects, the ones that have all the money and none of the oversight.

Now.

The same day, President of Semiconductor Solutions Charlie Cowas added that said mystery customers actually not open Ai, and I quote, I would love to take a ten billion dollar purchase order from my good friend Greg Brockman, CEO of open Ai, Cowas said he has not given me that purchase order yet.

Nevertheless, Broadcom stock popped nine percent on the news about the ten gigawa deal with CMBC, adding that the companies have been working together for eighteen months because it's open Ai.

Nobody sat and thought about whether somebody at Broadcom was saying, wow, well open has yet to ward these chips, yeah, and whether that was a problem.

In fact, the answer to how does open Ai thought this appeared to be they'd afford it when it came to analysts.

Now I'm gonna I'm about to read you a quote that is so funny when you realize that this is someone who makes like a shit ton of money.

Ahem.

The twenty twenty six timelines set out by open Ai for the buildout is aggressive, but the startup is also best position to raise funds required for the project given the heights of investor confidence, said gad Joe Sevilla, an analyst eMarketer.

Financing such a large chip deal will likely require a combination of funding grounds pre orders, strategic investments and support from Microsoft, as well as leveraging future revenue streams and potential credit facilities.

Hogwash, just complete, complete bollocks.

Insane that people pay these analysts bullshit.

Okay, So just let's just break this down financing such a large chip deal.

So ten gigawats, you're going to be looking at fifty bill dollars a gig was you look at that half a trillion dollars.

So to do this for this aggressive buildout, which was ten giga Watson three years, just not possible.

They would fund this by pre orders, pre orders for what exactly, because pre orders would be then pre ordering something from Broadcom.

Not really sure how that fixed the problem.

Strategic investments from whom just funding I guess, support from Microsoft funding again, I guess, And I don't know why Microsoft be paying for that, as well as leveraging future revenue streams and potential credit for say what what does that mean?

Saving money doing like a revenue trade deal?

Like what are you talking about?

Anyway, you don't need to worry because open ai solution to this was far simpler.

It didn't order anything.

During Broadcom's November earning school, where Broadcom revealed that the ten billion dollar order was actually from Anthropic, another l of them started that burnst billions of dollars, which was actually buying Google's TPUs from Broadcom, and he also added the Anthropic had made a second eleven billion dollar deal.

Alice somehow believed that Anthropic is positioned to spend heavily despite being yet another venture backed welfare recipient in the same flavor as open Ai.

Oh right, right, sorry, okay, Broadcom.

You may be wondering about the ten gig what deal though, because those earnings right well, Broadcom CEO hoc Tan said that he did not expect much in twenty twenty six from the deal, and guidance did not change to reflect it.

Now, what was great about this as well?

And I linked to this in the newsletter.

I really need you to go and look up how hoc Tan had the conversation because someone asked him for more detail and he just straight up said, like, I don't want to talk about it.

It rocks.

I honestly fucking love that.

Anyway, Broadcom climbed to a higher four hundred and twelve dollars a share leading up to its earnings, and I imagine it did so based on people trading on the belief that open Air and Broadcom were doing a deal of some sort together, which does not appear to be happening.

While there is an alleged seventy three billion dollar backlog for Broadcom, every dollar from Anthropic is utterly questionable.

Now, some of you might say, ed, we can't just automatically distrust public companies.

Actually, yes we can.

I'm doing it right now.

Whenever a company says a litter of intent, as in Video and sk Heinez and Samsung did, it's important to immediately stop taking the deal.

Seriously until you get to a specific word contract, not agreement or deal or announcement, but contract, because contracts are the only thing that actually matters.

A great example of this is in in Video's last earnings, they said they would be investing up to ten billion dollars in Anthropic.

Right, you'll notice that that was in the middle of November.

It's now January and we haven't heard boo about it.

It's probably because nothing's fucking happening.

And also that phrase up to as well means that it will be However much in Video wants to invest, if at all.

They only just did their Intel investment.

Anyway, whenever they say these terms, you need to just get suspicious.

It's time.

It's time to stop trusting them, because they've played enough hide the sausage for one EPOC.

I think it's time for everybody, analysts, the media, members of Congress, the fucking pope.

I don't care, to start treating these companies with actual suspicion and to start demanding timelines like I said.

In Video and Microsoft announced that fifteen billion dollar investment, and in Anthropic, where's the money?

Why does the agreement say up to ten billion for in Video and up to five billion for Microsoft.

Where's the money?

Where is it?

We haven't heard shit about it since.

What we have heard is that Anthropic is raising either ten billion dollars or twenty five billion dollars at a three hundred and fifty billion dollar valuation.

Where'd the money go?

Where the money go from?

Those fuck nuts?

But they go, Sorry, Jensen won for calling you a fuck n All right, you're acting like one though, mate.

Anyway, these deals are announced with the intention of suggesting there is more revenue and money and generative AI that actually exists.

Furthermore, it is irresponsible and actively harmful for analysts in the media to continually act as if these deals will actually get paid when you consider the financial conditions of these companies.

As part of its alleged funding announcement within Video and Microsoft and Thropic also agreed to purchase thirty billion dollars as your Compute, which is, for those of you who don't know, the compute cloud platform, the competitors to Amazon Web Services and Google Cloud that Microsoft runs.

It also agreed to Anthropic agreed to spend tens of billions of dollars with Google Cloud.

They ordered ten billion dollars of chips from broad Coom earlier in twenty twenty five, and apparently another eleven billion dollars of them in the last fiscal quarter.

How does Anthropic pay for them?

How Anthropic allegedly burned two point eight billion dollars last year twenty twenty five, though I think they burn much more and raise sixteen point five billion dollars in funding before Microsoft and then Videa's imaginary money.

How are investors tolerating Broadcom not directly stating the future financial condition of this company is questionable?

Has Broadcom created a reserve for this deal?

If not, why not?

Anthropic will make no more than five billion dollars in twenty twenty five, I'm sure of it, and raised about seventeen point five billion dollars with another two point five billion dollars coming in debt.

How can it foreseeably afford to pay ten billion, eleven billion or twenty one billion dollars considering it's already massive losses and all those other obligations I mentioned.

Will Jensen one hand over ten billion dollars so that Anthropic can hand it straight to Broadcom?

I don't think so.

I realize the counter argument is that the companies aren't responsible for the counterparty's financial health.

But my argument is that it's the responsibility of any public company to give a realistic view of its financial health and revenue sources, which includes not to give a chunk of its revenues from a startup that can't afford to pay for its orders.

There's no counter for that.

Anthropic cannot afford to pay broad Com ten billion dollars right now or eleven billion dollars in a few months.

Where is the money coming from.

They're allegedly raising twenty five billion dollars.

Great that ac shud lead them with four billion dollars to pay for what like thirty forty fifty billion dollars of compute costs.

I don't know.

Again, I ain't no mathematician, but I can put those numbers together and I can say that's a pretty big minus.

Again, I'm not even trying to be sarcastic here.

The things I'm saying are actually very rational.

They're very reasonable.

Anthropic even if they raised twenty five billion dollars, cannot pay even like a quarter of the things they've agreed to their existent revenue sources.

Even if they made twenty billion dollars in twenty twenty six, which they will not.

By the way, they are absolutely I just don't believe them about their revenues at all or any of the estimates.

But the problem is that in any bubble, being really stupid and ignorant works right up until it doesn't.

And however harsh the dot com bubble might have been, it wasn't harsh enough, and those who were responsible were left unpunished and unashamed, and that guaranteed that the cycle would happen again, and then it would be worse.

I want to be really abundantly clear about what's happening.

Every single stock you see growing because of AI, outside of those selling RAM and GPUs, is actually growing because of something else.

Microsoft, Amazon, Google, and Meta all have other products that are making the money and are still growing.

AI is not growing them.

And because analysts and investors in the media do not think about things for two seconds, they have allowed themselves to be beaten down and turned into supplicants for future public stock growth.

Investors have allowed themselves to be played, and the results will be worse than the dot com bubble bursting by several echelons and perhaps the biggest victims will be venture capital, which is existentially threatened by the AI bubble, But the actual victims will be regular people who made the mistake of trusting analysts or anyone who told them to invest in the markets.

But I'm going to be really simplistic for a second.

I am skeptical of AI because everybody loses money.

I believe every AI company is unprofitable with margins that are getting increasingly worse as they scale, and as a result, none of them will be able to get acquired or go public.

This means that venture capitalists that have sunk money into AI stocks and private AI stocks, I should be clear, are going to be sitting on a bunch of assets under management AEM the same assets they collect fees on because that's how venture capitalists make money that will eventually creter or go to zero because there will be no way for any liquidity events so taken in public or selling someone to occur.

This is at a time of historically low liquidity for venture capitalists, with Pitchbook estimating that there would be only one hundred point eight billion dollars in venture capital funds available at the end of last year.

Venture capitalists raise money from limited partners who invest in venture capital with the hope of returns that outpace investing in the public markets.

Venture capital vastly overinvested in twenty twenty one and twenty twenty two as well, and this was also a problem with private equity.

In simple terms, this means that these funds are sitting on tons of stock that they cannot shift, and the longer it takes for a company to w either go public or required, the more likely it is the VC or the P firm will have to mark down its value to something more realistic.

This is so bad that, according to Carter, as of August twenty twenty four, and that CARTA some of you can't understand how I talk.

As of August twenty twenty four, less than ten percent of VC funds raised in twenty twenty one have made any distributions to their investors, that's handing any kind of cash out.

In a piece from September twenty twenty five, Carter also revealed that about fifteen percent of funds from twenty twenty three have generated any disbursements as of Q two, twenty twenty five, and the media net internal rate of return was a median zero point one percent, meaning that at best most investors got their money back and absolutely nothing else.

And just to be clear, you don't invest so you can get an exact amount.

You don't give someone a dollar, wait four years and then get a dollar back.

That's not investing, that's just putting money in a box.

And in fact, investing in venture capital has kind of fucking sugged for a while.

According to Carter, as of the end of Q two, most VC funds across all recent vintages that's after twenty eighteen had a TVPI somewhere between zero point eight x and two x TVPI I'll get to in a second, but there are some areas where standout tvpis are surfacing.

TVPI means total value to paid in capital, or the amount of money you made for each dollar invested.

So if you invested a dollar point eight x would mean you got eighty cents back, and if you invested a dollar you get two bucks on two X.

I hope that makes sense.

Now, there's a chart in the newsletter version of this episode, which I encourage you to check out, but it tells you that for the most part, vcs have struggled to provide even money returns.

Since twenty seventeen, decent TVPI is two point five x, and as you'll see from the chart, things basically collapsed since twenty twenty one.

Companies are not going public or being acquired at the same rate, meaning that investor capital is increasingly locked up, meaning that limited partners are still wing for a payoff from the last bubbles.

Let learn this one now.

Carter would update the chart in December twenty twenty five, and things would somehow get worse.

TVPI soured further, suggesting a further lack of exits across the board.

The only slight improvement was the median IRR, which rose from zero point five percent from funds from twenty twenty one and zero point one percent for funds from twenty twenty two.

Those are still real, fucking terrible.

Those are absolutely astonishing.

I mean, a good IRR is ideally like fifteen to twenty percent, not zero point five percent.

I don't know, but in simpler terms, we are looking at years of locked up capital, even venture capital cash starved, and a little ESPRA.

The worst part is that all of this is happening during a generational increase in the amounts that startups need to raise thanks to the ruinous costs of generative AI and the negative margins of AI powered services.

Now, I'm going to quote myself from a December fifth newsletter called the Ways the AI Bubble Might Burst.

Cursor, Anthropic's largest customer and now it's biggest competitor in the AAI coding sphere, raised two point three billion dollars in November after raising nine hundred million dollars in June.

Now for twenty twenty five, and I should add these are on revenues of eighty three million dollars in the month of I think November October, because they said annualized revenues of one billion dollars.

Is dogship perplexity one of the most And I say this presitantly popular AI companies raised two hundred million dollars in September after using one hundred million dollars in July, after seeming to fail to raise five hundred million dollars in May.

After raising five hundred million dollars in December twenty twenty four for a fucking search engine, Cognition raised four hundred million dollars in September after raising three hundred million dollars In March, Coher raised one hundred million dollars in said temper, a month after it raised five hundred million dollars.

That's a lot of money, and that's a lot of money in a very small amount of time, and that's taking money away from everyone else because they need that money.

You need the money to invest in the stops.

But none of these companies are profitable, nor do they have a path to end acquisition or IBO.

And why do you say, why why do you ask?

Ede?

You're being so horrible?

What's because even the most advanced AI software companies ultimately prompting open AI or Anthropics models, meaning that their only real intellectual property is those prompts and their staff and whatever they can build around the models they don't control, which has been obvious from the meager acquisitions we've seen so far.

Another fun fact, Anthropic ended up cutting off people that worked to Xai that were using Cursor from using their models.

So, just to be clear, Cursor completely different company Anthropic.

If you work at a company at Anthropic doesn't like and I know we don't, we don't like elon mask, I get that.

But if Anthropic can arbitrarily cut off their models from somebody's completely independent product.

Just because they're deciding to cut off a competitor, they're just going to broaden the term competitor to mean anyone they don't like, anyone that gets in the way.

Now, Windsurf, which was allegedly being sold to open Ai last year, ended up selling its assets to Cognition in July twenty twenty five, with Google paying two point four billion dollars just to hire its co founders.

And this nebulous licensing agreement similar to the thing it did with Character to AI, where it paid two point seven billion dollars to reheigh Nome Shazir, who he was one of the authors of the Attention is All You Need paper that started this spars licenses tech can pay off the stock of its remaining staff.

This is also exactly what Microsoft did with Inflection AI and it's co founder, mister Suliman, who, and I quote someone who messaged me really recently, is a huge fucking asshole.

Now, mister Sulliman, if you hear this, I'm just quoting someone that works for you.

If they're saying that about you, perhaps it's worth asking why are people calling me a big fucking asshole.

I don't know.

Must Far come on the show and ask me yourself.

Now open Aiyes, acquisitions of Statsic one point one billion dollars, Ioproducts six point five billion dollars, in Neptune four hundred million dollars.

We're all in stock.

Every other major acquisition of this era, Wiz, Confluence, Confluent, even Informatica and so on, is either someone trying to pretend that something is related to AI, like Wiz, or trying to say that a data streaming platform is heavily AI related because AI needs data, which which may be true, but it doesn't mean that AI companies are selling and they're not, by the way, which is a problem.

As forty one percent of US venture dollars in twenty twenty five went to AI as of August, and according to Axios, the global number was around fifty one percent.

A crisis is brewing.

NERD Lawyer back in October wrote about the explosive growth of secondary markets, and I quote enter the secondary market a once niche corner of venture capital that has transferred into a primary liquidity mechanism.

What's remarkable is how quickly this market is matured at least five major venture funds have hired full time staff dedicated to manufacturing non traditional exits.

As Hans Swilden's CEO of Industry Ventures explained, all the brand named funds are all staffing and thinking through liquidity structures and professional buyers have flooded in.

Megafunds specializing in secondaries have raised unprecedented amounts.

Lexington raised a record twenty three billion dollars, or harbor Vest, Ardient and Collar Capital have raised funds in the ten to twenty billion dollar range.

In simpler terms, there are now hot potato funds where either another limited partner buys and other's allocation, the companies themselves by back their stock, or the stock is resold to other private investors who are building venture capital firms out of shit.

The venture capitalists can't sell.

You're seeing where the problem might be.

Eventually, someone's going to be.

It's not Bomberman.

It's not good now from the same NERD lawyer piece and I quote again, and they're not alone.

The secondary market is projected to handle one hundred and twenty two billion dollars in assets in twenty twenty five, Yet that still represents just one point nine percent of the total Unicorn value.

As in the side of Unicorn is a company worth a billion dollars, there's six plus trillion dollars in untapped liquidity potential as aside here.

That's a really nice way of looking at this.

The transformation of the secondary market from emergency tool to standard operating procedure represents the most significant structural shift in venture capital since the rise of unicorns.

It's not a temporary fix.

It's a permanent evolution driven by misaligned timeframes between fund life cycles ten years and company maturation eleven plus years.

I read that it's not just a temporary fix thing.

I'm like, is this ai anyway back to quoting for better or worse?

This is the new reality of startup funding.

Vizs can no longer afford to simply spray and pray and wait for exits.

They need active liquidity management strategies, and that fundamentally changes what kind of companies are getting funded and how.

I'm just going to be honest.

That last parts bullshit.

I wrote this in the newsletter.

That last part is whang.

This is not changing anything about what companies get funded or how they're still funding these unprofitable monstrosities.

Nothing has changed, and I would argue this piece frames that as a positive when the reality is far grimmer.

Venture capitalists are sitting on piles of immovable equity and companies worth far less than they invested in.

And the answer, it appears, is to find somebody else who is able to buy the dead weight.

I assume because they are stupid, Like I mean, I realize someone is going to say, well, actually, it means maybe they see maybe they can afford to hold it for longer.

No.

Now, if you're buying anything since twenty twenty one, you're probably get swindled.

And according to Newcomer Only, oney one hundred and seventeen venture funds closed in twenty twenty five, down from twenty one hundred and twenty twenty four, and forty three percent of dollars raised went to the largest venture funds, per The New York Times and Pitchbook, suggesting limited partners are becoming less interested in pumping cash into the system at a time when AI startups are demanding more capital than has ever been raised.

How long can the venture capital industry keep handing out one hundred million to five hundred million dollars to multiple startups a year, because all the signs suggest that the current pace of funding must continue in perpetuity as nobody appears to have worked out the generative AI is inherently unprofitable, and thus every single company is on the Silicon Valley welfare system until somebody or everybody gives up or the system itself cannot sustain the pressure.

I've read too many people make offhanded comments about this being like the dot com boom, and saying that lots of startups might die, but what's left over will be good.

And I hate them.

I hate so much.

I hate them both for their flippancy and for their ignorance.

None of the current stack of AI companies can survive on their own, meaning that the venture capital industry is holding them up.

If even one of these companies faulters and dies, the entire narrative dies with it.

If that happens, it will be harder for other AI companies to raise and even harder to sell an AI company to somebody else.

And if you can, you'll be selling it for less.

This is a punishment for a decade plus of hubris, where companies were invested in without ever considering a path to profitability.

Venture capital has made the same mistake again and again and again, believing that because Uber or Facebook or Airbnb or any number of other companies found in nearly twenty years ago were unprofitable, at some point with past the profitability, I might add, it was totally okay to keep pumping, pumpaning, pumping, I'm just saying it, pumping up companies that have had no path to profitability, which eventually became had no apparent business models see the metaversal Web three, which eventually have negative margins so severe, evaluation so high that we will need an IPO at the a market cap higher than Netflix at minimum.

This is Silicon Valley's rot economy, the desperate growth at all costs attachment the startups where you and I quote really liked the founder, where and I quote again the market could be huge who knows if it is, and where you just don't need to worry about profitability because IPOs and exits were easy.

Yeah, you see, venture capital used to be real easy because we were still in an era of hypergrowth.

You could be a stupid asshole who doesn't know anything, but there were so many good deals, and the more well known you were the more likely be brought them first, guaranteeing a bigger payout, guaranteeing more LP capital, guaranteeing more opportunities that were of a higher quality.

Because you were a big name.

It wasn't about being smart and knowing the fundamentals.

It was about being handed things.

It was easier to make a valuable company too, easier to get funded, and easier to sell because the goal was always get funded, grow as large as possible, or well go public.

And here's the thing about that as well.

They were just more ideas.

They want more ideas to do.

Like I said with the rock com bubble, they were just there were more things that people could create.

That's the thing that ideas are a finite source.

And when you incentivize this kind of thinking, you eventually stop incentivizing good ideas.

You incentivize the growth.

And as a result, venture capital encouraged growth at all cost, thinking above everything else.

In twenty ten, ben Horowitz said and I quote that the only thing worse for an entrepreneur than startup hell, which was bankruptcy, is startup purgatory.

And I quote when you don't go bankrupt, but you fail to build the Number one product in the space that's purgatory.

You have enough money with your conservative burn rate to last for many years.

You may even be cash flow positive.

However, you have zero chance to becoming a high growth company.

You have zero chance of being anything but a very small technology business.

From the entrepreneur's point of view, this can be worse than start up hell, since you're stuck with the small company.

What a fucking, noxious, ugly, horrifying thing to say.

Let me put it like this.

If you run a good business that people like and it's profitable, and you have good your employees like it, your customers like it, that's a good company.

That isn't hell.

And if you think that way, you're a fucking psychopath.

You're an actual nutter.

And this poisonous theory sadly paid off for him in that startups got used to building high growth, low margin companies that would easily sell to other companies of the markets themselves, right up until it didn't.

Of course, per nerd Lawyer, IPOs have collapsed as next sit route along with easy to raise capital.

Per pitch Book, since twenty twenty two, seventy percent of VC backed exits were valued at less than the capital put in, with more than a third of them being startups buying other startups.

In twenty twenty four, the money is drying up as the value of VC's assets is decreasing at a time when vcs need more money than ever because everybody is heavily leveraged in the single most expensive funding climate in history, and as we hit this historical liquidity crisis, the two largest companies, open aron Anthropic are becoming drains on the system that in a very real sense, are participating in a massive redistribution of capital reserved for startups to one of a few public companies.

No really hear me out.

Open Ai is trying to raise as much as one hundred billion dollars in funding so it can continue to pass money to one of a few public companies, thirty eight billion dollars to Amazon Web Services over seven years, twenty two point four billion dollars to Core We've over five years, and two hundred and fifty billion dollars over an indeterminate period on Microsoft Azure.

If successful, open AI's venture Telethon will raise more money than it has ever been raised in a single round, draining funds that actual startups need.

Anthropic has agreed, as I mentioned, to over seventy billion dollars in compute and chips deal across Google, Amazon, and Broadcom.

And that's not including this hut eight compute deal at Google is backing that I don't even really want to think about.

Think about it, just pre or simple for a second.

Instead of venture capital going to startups, you know, early stage companies taking a risk that much is going to Open AI and Anthropic so they can hand it to big tech.

This is big tech stealing from Silicon Valley and to see it as anything else is naive.

And this money will come from what remains of venture capital, private equity, and whatever hyperscalers will hand over yet elsewhere, even the money that goes to regular startups is ultimately being sent to those hyperscalers.

That AI startup that needs to keep raising one hundred billion dollars in a single round isn't sending that cash to other startups.

It's mostly going to Open Ai, who sends it to Microsoft, Amazon, Core, Evil, Google, Anthropic who sends it to Google, Microsoft or Amazon or one of the large hyperscalers such as Amazon, Microsoft or Google.

Silicon Valley didn't birth the next big tech firm.

It incubated yet another hyperscalar level parasite, except instead of just spending money on hyperscalar services and raising money to do so, both Anthropic and open ai actively drain the venture capital system as well as they both burn billions of dollars and need those billions of dollars to keep running the models.

The AI startups can pay them by creating something that's incredibly expensive to run, so destructively expensive to run, they can naturally create startups more dependent on the venture capital system, and the venture capital system has no idea what to do other than say, just grow baby.

Both open ai and anthropics models might be getting cheaper on a per million token basis, but they use more tokens, which increases the cost of inference, which in turn increases the cost of startups doing business, which in turn means Open Ai, Anthropic and all connected startups lose more money, which increases the burn on venture capital.

This is a doom spiral, one that can only be reversed through the most magical and aggressive turnaround we will see in history, and it will have to happen in the next year without fail, and it won't.

It's not going to happen and to find out why.

You just have to join me tomorrow for part three of the in shitter financial Crisis.

I'm Better Offline.

This is ed z trn fuck.

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