Big Tech’s playbook for AI investment

Tanay Jaipuria
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Read on to find out more about Big Tech’s motivations and the broader implications for the technology sector.

The last year has seen a flurry of activity from tech giants such as Amazon, Microsoft, Google and NVIDIA, as they poured investments into AI startups, particularly at the growth stage. These moves have shaped the trajectory of these startups and signaled a strategic shift in the tech sector. 

Let’s examine some of the potential deeper motivations behind these financial moves, and the broader implications they carry for the industry.

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A quick view of the AI startup investment landscape

It’s been a busy year for corporations investing in AI startups, with over 65 investments in the past 12 months.

Much of that activity has involved large rounds and checks, as the below graph in an analysis by Ansaf Kareem illustrates.

Notable examples have included:

  • A $10 billion round in OpenAI by Microsoft.
  • A $4 billion in Anthropic, led by AWS. Google subsequently followed with a $2.5 billion investment.
  • A $1.3 billion round in Inflection by NVIDIA, Microsoft and Google.
  • A $400 million round in Coreweave by NVIDIA.
  • A $141 million round in Runway by Google and NVIDIA.

Let’s discuss the rationale for some of these investments, and also touch on a contentious topic: Are some of these companies buying revenue via investments?

Investment rationale

These investments have been strategic in nature, so by definition, companies are not solely driven by returns. Some of the additional factors driving these investments have been:

  • Get access to differentiated models: Cloud providers have been aligning themselves with model developers, in part to make those proprietary models available to their cloud customer base and create a differentiated offering as they compete for AI and GenAI workloads. This started with Microsoft’s investment in OpenAI and was followed by Amazon and Google’s investment in Anthropic.
  • Influence market structure: One of the goals of NVIDIA’s investments in companies like Coreweave seems to be to “rainmake” certain companies to alter the cloud landscape, provide more options to end customers, and potentially position themselves as the “4th cloud provider” directly.
  • Acquire scaled users of infrastructure: Some of the providers recognize that we’re still in the early innings, and their infrastructure offerings need scale usage to iterate and improve. Investing in startups that are heavy users of these workloads is one way to do that. One example here is Anthropic agreeing to use Amazon’s Trainium and Inferentium chips for their next generation of models as part of their investment. Another example is OpenAI running on Azure, so Azure can improve their own products and infrastructure offerings. Taking this to the extreme, startups can also help provide co-development of technology for cloud providers, as AWS and Anthropic intend to do in terms of collaborating on the future development of Amazon’s Trainium and Inferentia technology.
  • Lock in certain customers: In the case of NVIDIA and perhaps some of the cloud vendors, investing in a customer that is already large could be perceived as a way of “locking them in” and retaining their workloads — especially as other alternative vendors try to offer them incentives to switch platforms or infrastructure.
  • Gain direct revenue: As part of these deals, cloud vendors have been able to informally or formally require the startup to use their particular cloud in what seems like a quid pro quo arrangement. In this type of deal, the investing company earns corresponding revenue from funding the startup. This is worthy of scrutiny and worth touching on a bit more.

But first, let’s go on a quick tangent to discuss Palantir and how they “bought” revenue via investments.

Palantir, SPACs, and buying revenue

In the heyday of the SPAC (special purpose acquisition company) boom a few years ago, Palantir did something quite out of the ordinary: They invested $400 million into 20 startups that were going public via SPAC, and the startups simultaneously signed deals to buy Palantir’s software. 

These multi-year deals were quite large, often as much as the investment from Palantir into the company. 

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Via Reddit

For example:

  • Flying Taxi company Lilium received $41 million as an investment from Palantir, and Lilium signed a five-year contract that paid Palantir $50 million. 
  • Online grocery delivery company Boxed Inc. received $20 million and signed a five-year, $20 million contract. Days after receiving Palantir’s money, Boxed paid $15 million to Palantir as part of the contract. 

Fast forward a bit, and most of these SPACs are down over 80%. Consequently, Palantir’s investments are not faring too well. But Palantir was able to “buy revenue” with their investments and show additional revenue growth during the period, partly driven by these deals in what amounted to a form of “round-tripping.”

Palantir has now stated they will no longer do such deals.

Strategic investors and the revenue impact of investments

What’s going on here with strategic investors? Let’s focus specifically on cloud providers and discuss three things that relate to revenue from these investments:

  • Are the investments driving revenue?
  • How are the cloud providers accounting for it?
  • How meaningful is that revenue?

Are these investments driving revenue?

Yes. For investments as part of these deals, cloud providers often partner with the startup so the startup uses their cloud infrastructure, although it is unclear if the investments require it contractually. This provides an avenue to increase revenue.

For example:

  • OpenAI uses Azure heavily for its offerings. This includes Azure’s AI infra to train models, Azure to run their own GPT API, and Microsoft’s CosmosDB to help power ChatGPT.
  • As part of Google’s first investment, Anthropic said it would use Google Cloud, and it also intends to use Amazon’s chips to train and run inference for its new models. This directly provides meaningful compute revenue to AWS, considering that Anthropic is likely to spend multiple billion dollars on training their new models, with compute driving 80-90% of that cost.

So in short, the investments are driving revenue — although the cloud providers could argue that the company chose them independently, as it’s not clear to the outside whether the investment terms explicitly require it.

How are they accounting for this revenue?

Cloud providers aren’t separately disclosing the amount of revenue that comes from the startups they invest in. While Google and Amazon haven’t said much about accounting, Microsoft has made it pretty clear that it accounts for the revenue from OpenAI in a typical manner, as it would for any other customer.

“But specifically to your question on how it shows up [in terms of accounting for the OpenAI relationship], it's easiest in this situation, to think about them as a customer of ours like any other customer who would use the Azure infrastructure and our Azure AI services, in service of supporting their end customers. And so when they do that, like any other customer who has a commercial relationship with us, we recognize revenue on that behalf.” — Amy Hood, Microsoft CFO

How meaningful is this revenue?

Since the numbers aren’t being disclosed, we don’t have a sense of how large a customer Anthropic is to GCP/AWS or OpenAI to Azure.

But based on a rough assumption, over the next 2-3 years, about 80% of their investment round may go into compute and/or infra, and a reasonable fraction of that goes to the cloud provider, you net out at $500 million-1 billion a year (or more) for now. However, if the cloud providers make more investments, that revenue would likely grow.

Here’s a rough sense of the scale of the cloud providers:

  • AWS is on a $92 billion revenue run rate, adding $10 billion a year.
  • Azure on a $65 billion revenue run rate, adding $14-15 billion a year.
  • GCP, inclusive of G Suite, is on a $33 billion revenue run rate, adding approximately $6 billion a year.

So an extra $1 billion a year or so isn’t that large, probably only corresponding to 1-3% of revenue for the provider.

However, from a revenue growth perspective, in the period shortly after the partnership, it could provide a relatively large boost and account for 5-15% of the revenue growth in that year if it ramps up quickly.

These cloud providers are likely to see some direct revenue and revenue growth as a result of these investments. I think it’s a good idea to account for the revenue — and not as obvious cases of “round-tripping,” given that cloud infrastructure is a bit of a utility-type product where you can only choose between 3-4 providers — and it would be nice if investments in startups required cloud providers to disclose meaningful revenue they brought in as part of their deals.

Perhaps if the number of investments or the size of their spend grows, we’ll see some better reporting and disclosures.

Unpacking the impact of tech giants' AI investments

The conversation about the tech giants’ investment in AI startups goes beyond the companies writing big checks. It’s about understanding the motives that drive these companies, and the consequences for the broader tech sector.

For companies like Amazon, Microsoft, Google and NVIDIA, I’d like to see tighter reporting requirements so we understand the terms of major investment deals and whether cloud providers are essentially “buying revenue” with their funding dollars.

If you find these conversations interesting and want thoughtful analysis of breaking news on tech giants, startups and more, subscribe to my Substack.

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