AI deal structures and SPVs raise risks for investors

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 6:00

   from a deal perspective you've read about these circular deals and whatnot could you explain what you mean by that yeah i mean there's a lot of talk out there but it all started when microsoft invested in open ai open i agreed to buy services from microsoft yeah which is called a circular deal because you're giving them money they wouldn't have otherwise and when dario was on stage at deal book last week he said oh i can explain this is not that hard amazon wanted us to spend money we didn't have so they gave us even more money and i'm like well that's precisely why this is a questionable behavior but it's gotten bigger you know NVIDIA's handing out money and then NVIDIA gave core weave money but then also agreed to buy any services they have left over this stuff's not ideal like if you were to say what's crisp clean accounting you know you

2. 6:50

   wouldn't do these kind of things and some of them say well it's not material in which i would say well then why are you doing it and i've asked other people to try on understand how even big, sophisticated companies might get speculative, using a word from the previous discussion. And, you know, I hear things like, well, loss aversion tends to go down when you're winning. Like if you're on a hot streak in a casino, you take more risk, things like that.

3. 7:17

   But it is surprising to me. So when it comes to retail investors, I would be particularly concerned for them at this stage in the ai game because there is a plethora of spv vehicles you've heard that phrase i'm sure spv this is where someone has an in on an investment and they do a one-off vc fund if you will special purpose vehicle yeah it's a single entity just to invest in x we have an allocation of however much money and then they can allow sort of jane doe and John Doe, potentially. And they take a rake on it. And there's people promoting SPVs in situations where they don't even actually have the underlying stock, or maybe they hope to get it. It's the wild, wild west. And most of the people on that edge, I would put in the category of interloper, carpetbagger. These are people that have come to this thing. And I just think you got to be

4. 8:14

   quite careful. The investments that were made that have already had 100X plus returns were made a while ago, you know, before this thing started. That's not to say there won't be an incremental AI investment that makes money. I think there will. But your odds right now of that being the case are really, really low. Yeah, I would add to that and say this applies to me as much as anyone else, but your actual risk tolerance may differ, probably does differ significantly from your perceived risk tolerance if you haven't had a huge drawdown, right? If you You haven't actually ridden a few of those waves and see how you respond in those circumstances.

5. 8:57

   And you should be, I suppose, skeptical of how you view your own intestinal fortitude with some of those things, or maybe the losses you can absorb. So I recall, for instance, I've seen this many, many times, but with these types of SPVs, people get involved. And let's just say they're not typically an angel investor. They don't have the experience of watching 60, 70, 80% of their investments go to zero or become the walking dead and they sign off on all of the not necessarily waivers but they accept accept accept unlike the spv terms of service which all say you could lose all of your investment this is incredibly risky yeah but then when it does go to zero you know the financial and psychological impact is catastrophic there's a lot of people and i think this comes from a very good place. I think they're very well-intentioned who look at the world and say, rising inequality,

6. 9:51

   like why can't everyone have access to the same things? And then companies are staying private longer. So they say, we need to institutionalize the generic public's ability to invest in private companies. I think there's two problems. One you just hinted at, which is most private company VC back to even go to zero, like the majority, which is not something people, they sense that they want the lottery ticket. They want the Uber. They want the one that goes to the moon, but they don't understand that that comes along with it. They don't want to buy losing lottery tickets for 12 years. Right, right. Exactly. And the second problem is the information transparency in the private company game is just low. And I think the institutional investors have come to understand that and kind of know what they're getting into and know how to evaluate things. But if you come

7. 10:47

   at it with a public market mindset thinking, oh, every set of financials I've been handed is audited and is correct, and that's just not the case. It's super loosey-goosey.