News about AI startups' financials can be suspect
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Illustration: Brendan Lynch/Axios
Investors are treating news about OpenAI and Anthropic's finances as if they were earnings reports from public companies. They are not.
Why it matters: The stock market, and a significant part of the real economy, depends on whether these massive startups can earn enough to justify the billions of dollars being plowed into AI.
The big picture: The reality is we know little about these companies' expenses, cash burn and profitability. The revenue numbers we're hearing about are dimly defined.
- It's unlikely we'll know much more until their IPO filings become public.
Catch up quick: Last week, a Financial Times report suggested that OpenAI's annualized revenue was lower than some had believed, by about $20 billion.
- Tech stocks dropped sharply on the news.
- Yet it wasn't some ratcheting down or coverup, but apparently an effort to measure OpenAI's revenue the same way Anthropic calculates its numbers.
Between the lines: The confusion is a good reminder that the numbers getting tossed out don't always mean much.
- "It's like a completely absurdist theater," venture capitalist and blogger Paul Kedrosky tells Axios.
Friction point: The metric you hear most often now is annualized revenue or annual recurring revenue, known as ARR. Or maybe to Kedrosky it's ARRGH.
- In the context of the big AI startups, these metrics are "inherently arbitrary and capricious."
Zoom in: Annualized revenue is a snapshot. Companies take what they make over a select time period, say a month, and "annualize it," sometimes by just multiplying it by 12.
- But its flaws are pretty intuitive — for example, try calculating your annual income based just on December if you get an annual bonus.
Follow the money: Still, ARR is a fairly standard way of working out revenues for software companies that charge monthly subscriptions and expect business that's relatively steady.
- The issue here, Kedrosky says, is that the frontier model companies are changing quickly in a volatile business. So ARR, already a flawed measure, is even less useful, he says.
- "The variability of the revenues over the course of days or even weeks is so big that the window I choose is basically me putting my finger in the air and saying, you know, fuck it, go with that."
- Most important, ARR doesn't tell you anything about costs or expenses.
Zoom out: If these companies were public, we'd know how much revenue they're recognizing each quarter.
- Revenue and profits are calculated under standard accounting rules. Annual financial statements are independently audited.
Yes, but: That doesn't mean public companies are perfectly transparent, of course. There are often issues that pop up (like the current debate over off-balance-sheet debt obligations).
Flashback: Still, startup revenue hype can melt away once a company is forced into the harsh sunlight of the public market.
- Just ask Groupon, a former tech darling. After it filed to go public in 2011, the company had to cut its reported revenue in half to comply with GAAP standards. Or take WeWork, when its 2019 IPO filing exposed details about enormous losses and long-term lease obligations. Its IPO plans collapsed.
What to watch: The Anthropic IPO is reportedly expected for mid-November. By then, we should have plenty of financials to put to the test.
