But "circular deals" has such a nice ring to it, that you hear it everywhere nowadays. People are just hungry for negative soundbites.
But "circular deals" has such a nice ring to it, that you hear it everywhere nowadays. People are just hungry for negative soundbites.
A stronger counterpoint to the circular deals suggestion is at the end of the article, which reads
> Michael Intrator, CoreWeave’s CEO, acknowledged the circular financing worries in a recent interview with Bloomberg News, but said the public concerns will dissipate as more businesses adopt AI.
> “When Microsoft comes to us to buy infrastructure to deliver to its clients who are consuming 365 or Copilot, I don't care what the narrative is about circular financing,” Intrator said. “They have end users that are consuming it.”
It's on you to decide then if end users are actually getting value / paying for AI products.
they're not
https://www.perspectives.plus/p/microsoft-365-copilot-commer...
What credibility does this guy have? Sounds like someone that has an axe to grind.
OpenAI => nVidia => OpenAI. That's pretty circular.
They've discovered a cheat code IMO. Instead of using and raising money themselves, use their reputation/popularity and use their suppliers market caps (e.g. NVIDIA, AMD, etc). The deal makes sense as long as the value projected to be added (i.e. via efficiency gains, loss of jobs, changing society, etc) exceeds the capital dilution for the supplier; they use their equity but the leftover equity value increase makes up for it.
Given all the passive investing, and funds invested in the top tech companies this is a VERY large pool of capital. It however increases leverage if the value doesn't materialise.
But this is not circular. Circular would be if I sell you an apple worth $0.25 for $2.00, and then you sell it back to me for $2.00, or other similar amount, and I get to mark all the apples in my inventory at $2.00 and show a huge profit (on paper). One can create variations of this blatant deal. Like I sell you some rubber for 10 times the market price, you make a balloon and then I buy the balloon for 10 times the market price. I may not have other balloons in my inventory, but plenty of rubber, and I show some nice profit. One can imagine other, fancier deals.
But in the case of AMD and NVidia, and OpenAI and Oracle, the direction is clear. OpenAI has a clear need for compute. They can buy it directly from NVidia and AMD, or indirectly from Oracle. They can buy it with hard cash (of which they don't have that much), or with their own equity, or some form of deal that offers the seller an upside in OpenAI's equity.
But there is not back and forth buying of the same item, or of rubber/balloons. All the deals seem legit. Is it possible that all the future compute will not be needed, because the AI craze will fizzle. It is, lots of things are possible. But that's general business risk.
When you draw a circle on a piece of paper do you put your pencil to the paper, start drawing a curve, stop and write the word FRAUD, and then complete the curve? Or do you just draw a circle?
I’m assuming that people are saying “circular” in that it looks like the money goes in a circle. (For one example) Nvidia invests in Lambda, Lambda buys GPUs from Nvidia, Nvidia leases GPUs back from Lambda, Lambda uses the revenue from leasing the GPUs to Nvidia to raise debt to buy more GPUs from Nvidia…
When you replace people with companies, the financing can become much more complex. The example you provided with Nvidia and Lambda seems quite reasonable to me. Here's an example that happens every day in the world of housing: banks lend money to house buyers. Then they package the mortgages and sell the resulting mortgage back securities. Then they take the money from the proceeds, and give more loans, and package them and create more mortgage back securities. Seems circular, right? But that's just how business is done. There is no Ponzi aspect to this, or fraud, or smoke and mirrors. It's just every day business. Nobody labels that as being circular.
> Is that circular?
Doesn’t really seem so because at the end of the day the money goes from me to them. I don’t get my money back, I get a car in exchange for my money.
Also this deal didn’t begin with the manufacturer purchasing shares of me before offering me debt to buy a car from them.
>But that is exactly what happens most of the time when people buy a car.
Your car manufacturer leases your car back from you? And you use that revenue to raise debt to buy more cars from them? What manufacturer are you doing this with? What do you end up driving?
Honestly, if this was possible people would be doing it (not that they are not - fleet services and rental fleet services do some pretty funky accounting sometimes, so I wouldn't be surprised at all if this sort of thing happened).
If this was possible, I'd be doing it.
> What manufacturer are you doing this with?
Good question. The minute an answer gets posted I'm going to have a really good side-hustle.
> What do you end up driving?
I presume, at the point that this is being done, there is no actual car involved, so nobody involved will be driving because there is no car to drive.
Yeah “everybody buys cars through the infinite car glitch” sounds like the sort of thing that would be part of an enormously long answer to “should I try WoW for the first time in 2025”
You sound like you know what you’re talking about. I only think I know what I’m talking about. Help me understand: What am I missing in the OpenAI / AMD deal that makes it non circular?
Honestly, I'm not an expert either, but I've run a company, and I can all but guarantee that credit_guy above really does not know what he is talking about.
I've replied else-thread, in detail, on exactly why his analogy to mortgage and car loans are incorrect.
His main point that "these deals cannot be circular because mortgage and car finance are not circular" is incorrect. The mortgage and car finance deals are not analogous to the Nvidia/OpenAI or AMD/OpenAI deals.
AMD: We need cash too, you know? We'd love to sell you those thousands and thousands of high end GPUs, that would cover some of our R&D, and we could one day match NVidia. But we don't swim in cash either. We can't give you the discount.
OpenAI: What can you give us? You must be able to throw in something there. Otherwise, honestly, we can't make the deal.
AMD: What if we give you some equity? And if our deal goes well, and our GPUs start being viable alternatives to Nvidia's, maybe we'll be able to get close to Nvidia's market cap and even surpass them, just like we did with Intel.
OpenAI: Brilliant. We love it.
AMD: Yes, but that equity will be contingent on how the deal goes.
OpenAI: Sure thing, we'll take that.
The AI startup valuation largely is. I feel it quickly becomes circular because people make projections purely on other projections since the world is too impatient to wait and find out.
A single hamburger store is never going to be projected to have a billion dollars of revenue because people understand the total addressable market. Doesn’t matter how good the burger is.
The AI stuff is too new that people don’t have a firm grasp on the costs and profit opportunities. They don’t really even know how to define the TAM. Too many unknowns. Entire classes of labor could be replaced by AI —- or perhaps not.
With little grounding, it quickly becomes a circle of hype.
This process is described in the Bible for example!
Perhaps it has some psalms discussing merits of MMT, or parables on Quantitative Easing.
No, they don't!
Serious "Citation Needed" here. They get a loan from a financial services company, that is a separate company from the automaker and/or dealership.
The certification and requirements for trading as a credit provider will not be met by neither the auto manufacturer nor the dealership.
> Here's an example that happens every day in the world of housing: banks lend money to house buyers. Then they package the mortgages and sell the resulting mortgage back securities. Then they take the money from the proceeds, and give more loans, and package them and create more mortgage back securities. Seems circular, right?
No, it doesn't! They make out new loans, sure, but they aren't loaning you specifically the proceeds from the sale of your specific mortgage-backed security!
If you happen to get a new loan from the sale of the MBS, it is impossible that only you get that loan, from the sale of an MBS that had only your existing loan.
Seriously, there's laws and regulations around this, and from what you say, with all due respect, it seems that you are unaware of these regulations.[1]
The only reason that these actually-circular deals can go on right now is because OpenAI (and other providers doing similar circular deals) are not publicly traded, and thus there are fewer regulations and even fewer enforcement of what little regulations there are for unlisted companies.
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[1] Why is your handle "credit_guy"? You don't appear to be familiar with the fact that credit providers are heavily regulated in all jurisdictions that we are talking about. I mean, you don't even need to know the specific regulations and certifications necessary, you just need to know things like a dealer cannot be a credit provider too.
Some, certainly, but the vendor-financing deals certainly look circular to the casual observer. Microsoft invests $X into OpenAI for a 51% (or whatever) stake, and that investment then goes straight back to Microsoft to pay for compute credits.
Or Nvidia invests[1] $100m into OpenAI, which OpenAI then turns around and pays back to Nvidia for compute.
The majority of the deals making the news are structured like this; maybe technically those aren't actual ducks[2], but they sure look, walk and talk like ducks.
Similarly structured deals are with Oracle. And Coreweave. And everyone.
It may not be a "circular" deal, but what do you expect people to call it when a company makes a deal to receive cash (not credit, but actual cash) from a vendor, and spends that cash with that vendor?
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[1] I use this word loosely here - the investment is a commitment of 10x $10m tranches.
[2] I.e. circular deals.
This distinction is important to me because I see more concrete evidence for a possible material drop in NVIDIA's business short- to medium-term than a collapse of the sector as a whole. The chips act clearly shut them out unexpectedly from their second largest market and now it seems likely that Chinese chips will be competitive for training sooner than expected. Indeed, if Chinese AI firms are suddenly able to obtain even a roughly approximate product at considerably less cost, OpenAI will suddenly find themselves at a cost if not compute disadvantage to their Eastern competitors. It isn't a surprise, then, that OpenAI is now looking to reduce their present vendor lock-in with NVIDIA.
Overall, it's not great for the latter if they lose access to their second largest market, suddenly have viable competitors in their home market, and either lose some of a major client's business or have to significantly reduce pricing to retain it.