The AI Money Trap, Part One

vagabonds and scallywags. I'm so proud of our community. Anyway, this week's going to be a fun one and two part of plus a special report on GPT five, and it's kind of a culmination of the last year and a half of work that I've done covering the AI bubble. Now, the reason I return to this subject so often is because each week I've become more and more convinced that the only way the AI bubble ends is well badly.

Every week I see more and more evidence that this is structured in a way that is doomed when not even abruptly, but they were going to be abrupt little farts, little burps as the bubble begins letting out air, and in a way where I see people in innovation as

the collateral damage in the global financial crisis. The Federal Reserve and the US government, as well as other equivalents around the world, work to ensure that when a bank or hedge FuMB went under or a big insurance company became insolvent, the collapse was managed in a way that

didn't implode the entire financial system. The difference with AI is first that it's nowhere here as essential as financial services to the global economy and thus unlikely to be saved as AIG was in two thousand and eight, but also that there's no real way for this to end gracefully, just due to the way all of this is happening, how it's built. I'll get into it, and all the signs are now there, And I have been hesitant to

make this call the whole time. By the way, where well, there's a contagion here, where one precarious company falls, the rest eventually tumble, sparking a chain of events that will

be well, pretty bad. But how does this end? At the start of August, we saw no less than three different pieces, two in the Wall Street Journal and one in the Financial Times, Financial Nacial Times, Who Cares, published within the span of one week, all asking the same question whether the massive proliferation of data centers is a massive bubble, and honestly, since then there have been several more.

Although these publications at times seem to have taken the default position of AI's inevitable value, they've begun to sour on the idea that it's going to happen anytime soon. To be clear, these are sensible, well respected business newspapers,

hardly partisan voices from the AI wars. Separately, CNBC reported that quirked up three hundred cores and open ai is either raised or is about to raise another eight point three billion dollars in cash, less than two months since it raised ten billion dollars from SoftBank and a selection of other venture catital firms. While this sounds ambiguous, this reporting only claims that it has secured that funding, not

that it's received it, which is an important distinction. I've pointed out in the past that secured funding often comes with its own conditions attached. On toime top of this, I should add that there is currently a rumor that open ai insiders, so the people working at the company, are selling six billion dollars with stock at a five hundred billion dollar valuation that's around the price of Netflix. This is fucking stupid. It's so stupid, and every time

I read about it, I feel a little insane. But it's also weird that you've got people like soft Bank and Dragonea who invested in the eight point through billion dollar round, who are also buying the stock. All this sounds stinky and I hate to be crude. I hate to be too crude here, But where the fuck is all this money going. Is open ai just incinerating capital? Is it compute? Is it salaries? Is it more compute?

Is it data centers? Because soft Bank isn't actually building anything for stargate It's all okay, I calm down a little bit, but it's all getting a little bit silly now.

The information, which has some of the best sourcing in any publication covering the AI bubble, i'd argue, though I've taken issues with their reporting in the past, suggested that open ai intends to use this money to build data centers, possibly the only worst investment it can make than general ivai, and it's the one that open ai can't really avoid because they're also somehow running out of compute two and

amongst this already ridiculous situation. Since the issue of open Ai and Anthropic's actual revenues, which I wrote about my premium newsletter on the first of August Please give Me Money, and have roughly estimated to be five point twenty six billion dollars in the case of open Ai and one point five billion dollars in Anthropic as of July. Now, to be clear, there are very different numbers going around.

Get to in a second. In any case, these estimates were made based on both companies predilection for leaking their annualized revenue or month times twelve. Now, this extremely annoying term annualized or recurring revenue is one that I keep bringing up because it's become the de facto wait for GENERATIVEAI companies to express their revenue, and both open ai and Anthropic leaking them intentionally and doing so in a way that suggests that they're not even using the traditional

ways of calculating them. Because arr isn't in and of itself an evil thing, it's fairly stand up within software as a service companies, except they run completely different to

open ai and Anthropic anyway. Open ai leaked on July thirtieth, twenty twenty five, that it was at twelve billion dollars of annualized revenue, so it earned around eight hundred and thirty three million dollars in some sort of thirty day period, and then two days later, on August first, twenty twenty five, the New York Times reported it was at thirteen billion dollars annualized, at one point eight billion dollars of monthly revenue.

It's taking the pierce a little bit. It's very clear open AI is not talking in actual calendar months, at which point we can assume they're using like a trailing thirty day window, as in the month is just thirty days, rather than a calendar month like May or June or July.

We can, however, declaratively say that it's not saying the month of June or the month of July was twelve or thirteen billion dollars annualized, because if it was, they wouldn't have given two vastly different goddamn numbers in the same two day period. It doesn't make any sense. And to be clear, while I can't say for certain, I believe these leaks are deliberate. Open AI is timing matches exactly with the fundraise. Similarly, on Anthropic side, these revenues

are beginning to get really, really weird. Anthropic went from making around seventy two million dollars eight hundred and seventy five million dollars annualized in January to four hundred and thirty three million dollars in monthly revenue in July, or at least it leaked on July first, twenty twenty five that it was at four billion annuallyzed to the Information, which is three hundred and thirty three million dollars, and then claimed it had reached five billion annualized four hundred

and sixteen million to Bloomberg on July twenty ninth, twenty twenty five. I'm so tired of this. Something stinky is happening. The people who will not admit something stinky is happening, I'm beginning to question their sanity or whether they're just inherently corrupt in some way. And you can be corrupt without money, you can just do it for your mates. Anyway.

How did Anthropic get there, I'm guessing it was from cranking up prices on Cursor, a product made by a company called any Sphere that lets developers generate code using Anthropics models and other models, and we've had the confirmation that's the case thanks to the Information reporting the one point four billion dollars of the annualized revenue from Anthropic. It's from its two top customers, so around one hundred and sixteen million dollars in a month, and the biggest

of which is Cursor. Confusingly, the Information also says that Anthropics Clad Code is generating nearly four hundred million dollars in annualized revenue, roughly doubling from just a few weeks ago. Per their report, it's around thirty three million dollars a monthly revenue. They really jacked that product up. I need to do a whole thing on glored code if I'm honest, because that whole thing has become a complete nightmare. They've had to completely the weekly rate limits are coming. God,

what a fucking mess. Every time I think about this company get upset. In any case, I think Cursor is a huge indicator of the current fragility of the bubble and the fact that for most AI startups there's simply no way out because being acquired or going public does not appear to be a viable route. But before I explain, please listen to one of the many stable, normal advertisers that gives money to the show, not to me, though I don't get the money from the ads. And we're back.

So how exactly is one AI powered coding environment such a load bearing part of the AI trade. We're going to be focusing now on both the fact that Cursor is a systemic risk to the AI industry, one where if it fails, could make every other player that bit less secure, and the fact that Cursor is emblematic of what makes general if AI companies so paradoxical, where you can have bonkers valuations on one hand, but also no way for these companies to go public or sell to

someone else and justified the actual valuation itself. I know it sounds a little insane, but I believe that Cursor is the weak point of the entire bubble, and I'm going to explain why and how this could go. This is by no means inevitable, but I cannot work out what Cursor does other than this Cursor makes before at least the massive changes to its service. Though Tom the town over at Newcomer suggests that the revenue is still

going up. For now, they make about five hundred million dollars in annualized revenue around forty two million dollars a month. This makes it the single highest earning general IFAI company that isn't called AI or Anthropic, and the highest learning company built on top of primarily Anthropics models. Its success is symbolic to the greater AI movement and just as it hit its peak, Anthropic and open Ai to a

lesser extent, though they seem more interconnected. During GPT five's launch, decided to add priority processing in priority service tiers, demanding more money upfront and causing Cursor to have to massively degrade its service to keep up. I also have a premium piece that explains this from a few weeks go within a monologue two and it's over at wezered dot app.

Please give me money to explain In short, curses AI powered coding Editor used to have fairly unrestrained access to the various models provided by companies like open Ai and Anthropic. In mid June, a few weeks after Anthropic introduced priority tiers that required enterprise companies to pay upfront and guarantee a certain throughput of tokens and increase costs on prompt cashing, which is a big part of AI coding. Curse mass the change the amount its users could use its product

and introduce the two hundred dollars a month subscription. As an aside to this, Anthropic also competes with Curser's AI coding product with Clawed Code, its own service. I've talked about it in the past, and I'll talk about it some more in this series too. Cursor, as Anthropic's largest client, the second being GitHub Copilot, represents a material part of its revenue, and its surging popularity meant that it was

sending more and more revenue to Anthropic. Anthropic use this opportunity to raise prices on accessing its models to continue providing service at an acceptable level to Cursor's customers by introducing priority toier access on May thirtieth, twenty twenty five. This has allowed Anthropic to duce its revenues, and due to the upfront nature of these contracts, Cursor is locked

in regardless of how well it does. The net result of these cost increases means that Curser's product is less attractive to its customers and will thus eventually make it less money. At this point, one has to ask, how does Cursor survive. Its product isn't profitable and the means it used to make the company so successful have become untenable. It is guaranteed a certain throughput of tokens per second

to the major model developers. Chief of the meanthropic. But Cursor itself said in the whole Cursor Ultra two hundred dollars a month thing that it signed multi year deals with multiple cloud providers like open Ai, Xai and Google. Cursor's product is now worse by the way. They also have made it so the automodel that used to be unlimited will now as of September fifteenth, charge a fee. It's so fucking funny. I love this shit. It's so

funny watching this happen. But really, people are going to cancel their subscriptions, their annualized revenue will drop, and their ability to raise capital will suffer. As a direct result, Cursor will, regardless of this drop in revenue, have to pay the cloud companies what it owes them as if it had the business it used to because it was

a guaranteed throughput. I've spoken to a few different people, including a company with an enterprise contract, either planning to cancel or trying to find a way out of their agreements with Cursor, and they were planning to do so as recently as April. I'm sorry recently as April. I mean they were planning to do back in April, before this shit happened. I'm not a here, you do understand anyway.

If Cursor is allowed to die, it will be unable to pay a chunk of Anthropic and open AI's revenue, and yes, the revenue of people like Xai in Google as well. It also brings into question whether it's possible to build, putting aside any questions of profitability, a business of any kind offering services built on top of generative AI models, and in turn bring into doubt the veracity of investing in this sector writ large. It will also call into question whether any other generativai company is a

real business. This will naturally lead to the question of why we're building all these goddamn data centers. Cursor at this point faces two options, die or get acquiet. This is not an attack on anyone who works at the company, nor anything personal. The unit economics of this business do not make sense, and yet on some level. Its existence

is deeply important to the valley's future. And a large chunk of anthropics revenue I should add, and Tom totan over it, and Newcomer added something like ten percent of anthropics revenue comes from Cursor. This is so bad, but I'm gonna humor this. I'm gonna hue in this big time.

Who would actually acquire Cursor? Maybe open Ai, but they couldn't acquire Windsurf for another AI company because they were too worried that Microsoft was going to get the somehow essential ip of what appears to be one of one hundred different AI powered coding environments. They also already trade and failed to buy Cursor. And if I'm honest, I would not be surprised if Curser would sell.

that one either. They've already got their own extremely expensive coding environment, which I estimated in my premium newsletter loses the company one hundred percent to ten thousand percent of a subscript subscription per customer. That's like a monthly subscription just from us. And they did that a few weeks ago. And now Anthropic, as of August twenty eighth, is adding weekly limits on accounts, which I believe creates some of the most gnarly churn in SaaS history. It's going to

be quite nice. Also, does Anthropic really want to acquire its largest customer also with more money. They're not raising five billion dollars to bail out Cursor. Anthropic needs that to feed directly into Andy Jesse's ass pocket to keep offering increasingly more complex models that never quite seemed good enough to make any money. But how about Google? They know they just sort of bought Windsurf, but I'll get it's a complete mess, and they can't do that again.

They've already given out the participation trophy multiple billions of dollars to investors and founders, so nobody has to get embarrassed about this. And then allowed Cognition to pick up the scraps of a business that made six point eighty three million dollars a month after burning one hundred and forty three million of investor capital, and tech runch reports that Windsurf was left for about one hundred million dollars

in cash post acquisition. Tech Crunch also reports that Cognition paid about two hundred and fifty million dollars for what remained of the company. Google paid like two point something billion dollars to just take the founders, and Cognition picked up the rest. And this deal, by the way, didn't actually pay out the majority of Windsurf's employees. He I'll have the links to the links to all of this

in the notes. This whole deal is real sickly though, that the investors got paid out, the founders got paid out, the employees got fugged. It really sucks. I'll get into it in a bit, but let's go with meta. Here's

the thing. If I'm Michael Truell, the CEO of Cursor of any Sphere, even I am calling Mark Zuckerberg, and I'm pretending that I think the only person in the world who can usher in superintelligence is the guy who burned more than forty five billion dollars on the metaverse and believes that not wearing AI glasses in the future will be a disadvantage. I would say all manner of shit about the future, and that the only way to do this was to buy my AI powered coding startup

that literally cannot afford to exist. I would tell Zuckerberg anything. I would be like, mate, I just watched the actual star I think you're the people from Stargate. He's never gonna watch Stargate. He's just gonna be like, whoa, yeah, I've heard that's a TV show. Wow, A great. And then you get however much money you need, just twenty billion dollars, He'll just pull that out of his pocket. He has it. He has twenty billion. He'll just handed to you. He's probably got it in is like in

his safe. Just go and ask mine, how much money do you think Mark Zuckerberg's got his safe? Email me, email me with the guests. Anyway, This whole can't afford to exist thing that really is the problem. These companies are all going through the same motions that every company before them did. Raise as much money as possible, get as big as possible and eventually scale to the point

of the e fat with enterprise cash. Except the real problem is that, just like the Big text New gluttony of physical real estate, it's taken on general ifai company is a burden with a constant aggressive form of cloud damn the endless punishment of the costs for accessing the API for general if ai models that always seem to get a little bit better, but never in such a way that anything really changes other than how much Anthropic and open Ai are going to need at the end

of the month, or they break your startup's legs. I'm not even trying to be funny. Anthropic raised its prices on curses so severely it broke its already unprofitable business model. These products, while also for the most part not producing that much revenue, need to be sold with users being aware of and or sensitive to the costs of providing them.

The Cursor's original product was a twenty dollars a month service for five hundred fast requests of different models, in the same way that accessing clawed code on any subscription is either twenty one hundred or two hundred dollars a month. Rather than paying per API cores, because these companies also products that shield the customer from the actual costs of

running the services, and those costs could be vast. One article, which I'll link to in the spreadsheet, argues that given the trajectory of the development of AI models, it's not unreasonable to imagine a full time engineer spending one hundred thousand dollars in tokens each year per engineer. Just really think about that for a second. I'll have the link in there. It's fucking stupid. It's so fucking stupid, I

want to scream. And the irony is that, despite being willing to kill these companies by fundamentally changing the terms and put in which they access their models, Anthropic is also in some way dependent on Cursor, Repler and other similar firms continuing to buy tokens at the same rate as before, as that consumption is baked into their own arr figures, as well as the forward looking revenue projections they've given to investors to convince them to give them

five billion dollars. It is, in some sense of Kobyashi maru Anthropic is an existential need to screw over its customers by hiking rates and imposing long term commitments, but its existence is also in some way predicated on these

companies continuing to exist. If Cursor and Replit both die, that's a significant chunk of anthropics API business gone, and may I remind you that significantly overshadows its subscription business, making it almost like an inverse of open AI, where subscriptions drive the bulk of revenue, also a shitty business model.

Anthropic's future is wedded to Cursor, and I just don't see how Cursor survives, let alone exists or gets subsumed by another company in a way that mirrors our acquisitions have worked since Ever, if Curser does not sell for a healthy amount, I'm talking ten to twenty billion dollars, and I mean actually sell, not the founders are hired and a strange contractual agreement that pays out investors and its assets are sold to Rick from porn Stars. It's pawn.

By the way, it will prove that no generative AI company to this date has actually been successful in reality. I expect a Chumley esque deal that helps CEO Michael Truell by a Porsche while his staff makes nothing. It's Cursor worth ten billion dollars or more. No, no matter how good its product may or may not be, it is not good enough to be sold at a price that doesn't require Cursor to incinerate hundreds of millions of dollars with no end in sight. And this ultimately gives

us a real conundrum. Why aren't generative AI startups selling I'll tell you what, though, other people are selling stuff and it's time for you to buy it. Listen to these ads and let me know what you think at my email address, which is Robert Evans app and we're back. So, really, though,

why are there so few generative AI acquisitions? I know you're probably going to assume that there have been a ton of them, right, if you've not been obsessively reading every single story about that for over a year, you might have missed it. Book before we go any further, there have been some, but they've been sparse, and they often have a weird structure. That's typically the exception, not

the rule in tech. So here's a real one. AMD bought Silo AI, the largest private AI lab in Europe, in August twenty twenty four, for six hundred and sixty five million dollars, which appears to be the only real acquisition in generative AI history and appears to be partially based on Silo's use of AMD's GPUs Elsewhere, n Vidio bought Octo AI for an estimated two hundred and fifty million dollars in September twenty twenty four, after buying Brev

dot Dev in July twenty twenty four for an undisclosed sum, and then Gretel in March twenty twenty five. Gretel, Brev dot Dev, Octa AI. Jesus fucking Christ, these names be normal. Be normal for one minute. Yeah. In all three cases, these products are used to deploy generative AI and not products built on top of generative AI or AI models. Canva bought generative AI content and research company Leonardo dot Ai in July twenty twenty four from this closed sum.

But that's small frame. Really. The only significant one I've seen was on July twenty ninth, twenty twenty five, publicly trained did customer service platform Nice buying AI powered customer service company Cognigee in a nine hundred and fifty five million dollar deal. I hate these names so much. According to c X today, Cognitigi expects about eighty five million dollars in revenue this year, though nobody appears to be

talking about how much it costs to make that revenue. However, according to some sources, they judged tens of thousands or hundreds of thousands of dollars per contract for their AI voice agents that can understand and respond to user input in a natural way. Great. Great, we've got one real deal company built on models acquisition, and it's a company that most people have heard of making around seven million dollars a month. But let's take a look at the others.

So you probably remember Inflection AI to Microsoft, which was not an acquisition but a six hundred and fifty million dollar licensing deal that, according to Fast Company, may be more like a billion dollars when you include things like how much it paid to Inflection CEO and former DeepMind co founded mister Foss Suleiman, who is most famous for just being an abusive and horrible guy to work with. Here he's pushing a horrifying nine ninety six culture and

Microsoft two to do what Muster Phi, You fucking prick. Anyway, according to Fast Company, the deal involves a license to sell Inflections models, a waiver against any employment claims against inflection or Microsoft paying off investors in some sort of unnamed compensation for employees. Sounds stinky to me, but let's look at Twinsurf to Google and of course Cognition, which

was also not an acquisition. Windsurf c suite went to Google for two point four billion dollars, which paid them off along with their investors, and then the rest of the staff and the product got acquired by Cognition for

two hundred and fifteen million dollars. According to tech Crunch, investors made one point two billion dollars on the deal, with Windsurf co founders Van Mahan and Douglas Chen making another one point two billion dollars, and it's staff getting to start a new job at a different company building something else with According to tech Crunch, a large portion of Windsurf's approximately two hundred and fifty employees not benefiting from the deal as on the side Mahan and Chen

fucking suck. I fucking hate these guys, absolute loser psychopaths. You make one point two billion dollars and you couldn't break off a little bit from that, You fucking ah disgusting. You can can't crack that two hundred billion. The point two. You can take two hundred million dollars, share it with the class. You fucking losers, assholes, pieces of shit. Come on the show if you want to hear more words like that, you fucking assholes. Anyway, let's talk about Ioproducts

going to open Ai in an all stock acquisition. This dealers a fast and it's unclear of open Ai actually bought anything six point four billion dollars in stock for what. Johnny Ive's weird face staring at you lovingly as he says things like I think we should make it look like a circle while making a five million dollars a year's salary. Get out of here. It's not real money. And then, of course this character dot Ai to Google.

This was also not an acquisition. Google, to quote the Wall Street Journal, paid two point seven billion dollars to bring back an AI genius who quit in frustration. I would not use the term genius. Well, I don't like that term. Just to be clear, Shazir was one of the authors of the original Attention is All You Need

paper that began the transformer based large language model era. Nevertheless, much like Inflection, Google paid a licensing fee to character dot Ai for its models and hired, according to the information it's co founders and many of its engineers, creating a fund that would pay out vesting shares as in the shares you're given when you join a company that you accrue over time as you work there until July

twenty twenty six. Anything after that you fugged. And now, outside of one very industry specific acquisition, there just doesn't seem to be an investor with the hunger to buy a company like Cursor value that nine point nine billion dollars or more if they raise another round, And you have to ask why. If ai is has promised the thing that will radically change our economy and these companies are building the tools that will bring about that change,

why does nobody want to buy them? And in broader terms, what does it mean when these companies, those with ten billion dollars are, in the case of open Ai, three hundred or even five hundred billion dollar valuations. What does it mean when they can't be born and can't go public. Where does all this go? What happens next? What's the plan here? How will venture firms that plow billions of dollars into these businesses bring a return for their LPs.

That's the limited partners who invest in the venture capitalists. If there are no IBOs and no real buyouts, Sure investors got paid in these deals, but these deals will like pulling teeth. These are like if they do enough of these, there will, even in this administration, be an

antitrust thing. Nevertheless, the economic implications of these questions are quite frankly terrifying, especially when you consider the importance that VC is historically held in building the US tech ecosystem, And they raise further questions about the impact of an AI bubble on companies that are promising and do have a viable business model and a product with a natural fit, but won't be able to raise any cash because everyone's putting it into fucking AI. But ed great ed? What

if Cursor turns profitable? Now great awesome? I would believe if it was possible, if it ever ever happened, which it's not. I'm not even being sarcastic or rude. It's

just not happened. No company that actually stakes their entire product and genera if AI appears to be able to make a profit of any kind, glean a company that makes the best eight point three million dollars a month, one hundred million dollars an anionized revenue, said that it had five hundred and fifty million dollars in cash in December of last year, then raised one hundred and fifty million dollars in June of this year. Where'd the money go?

Why does a generative search product with revenues that are less than a third of the Cincinnati Reds baseball team need a half billion dollars to make eight point three billion dollar eight point three million dollars a month. Even I'm not even saying these companies are unnecessary so much as they may very well be impossible to run as real bits businesses. This isn't even a qualitative judgment of

any one generative AI company. I'm just saying if any of these were good businesses, they would be either profitable or be acquired in actual deals, and there would also be good businesses by now it is not early. That argument is stupid. The amount of cash that these businesses are burning does not suggest that they're rapidly approaching any kind of sane burn rate, or we would have heard putting aside any kind of skepticism. I have anything you may hold against me for what I say or the

way I say it. I ask you this, where are the profitable companies? Why isn't there one outside of the companies creating training data or in Nvidia. We're three years in and we haven't had one, one one of them, one one. We've also had no real exits and no IPOs.

There's been no course for celebration, no validation of a business model through another company deciding it was necessary to continue its dominance by raising funds on the public market or allowing actual investors thought they may be, to act as a determiner of their value. I also will say that very few, if not all, of these companies, they would all just turn into a pillar of salt if you made them fill out on S one, which is

the document to go public. It's also unclear what the addition of windsurfs intellectual property actually adds the cognition, much like it's a little unclear what differentiates cognitions so called aipowered software engineered Devin from anything else on the market. I had Goldman sachs Is paying for it and said the stupidest shit I've ever heard, the CNBC that nevertheless shows how little it's actually paying for. This is an

actual quote from an actual human being. We're going to start augmenting our workforce with Devin, which is going to be like our new employee, who's going to start doing stuff on behalf of our developers are gent told CNBC initially we will have hundreds of devons, and that might

go into the thousands depending on the use cases. Hundreds of devons could mean hundreds of seats at are very optimistic, five hundred users at the highest end possible at five hundred dollars a month, and more than likely it's twenty dollars a month. If not less. Let's assume that it does discount an enterprise scale too, because that always happens. It's about two hundred and fifty thousand dollars a month. Wow, Wow, three million dollars a year in revenue on a trial

basis amazing. To be clear, it's probably far fewer seats and far fewer dollars a month. I'm nothing if not generous with my adversaries. In fact, I can't find a shred of evidence that cognition actually makes money, despite currently raising three hundred million dollars at a ten billion dollar valuation. I can find no information about their revenues beyond one comment from the information from July twenty twenty four, when

Cognition raised at a two billion dollar valuation. Cognitions fund raises the latest example of AI startups raising capital sky

high valuations despite having little or no revenue. Cool In a further move, per the Information that is both a pale horse and a deeply scummy thing to do, Cognition is now laid off thirty people from the Windsurf team and is now offering the remaining two hundred buyouts equal to nine months of salary, and I assume the end of any chance to recruit further stock and Cognition CEO Scott Woo said the following in an email, telling Windsurf employer is about layoffs and buyouts. We don't believe in

work life balance building. The future of software engineering is a mission we all care so deeply about that we couldn't possibly separate the two. We know that not everyone who joined Windsurf is signed up to join Cognition, where we spent six days at the office in clock eighty plus hour weeks. Fuck you man, fuck you. I'm sorry. You shouldn't be proud of that, and all that pissed vinegar and burning of the midnight oil does not appear to have created a product that actually matters. I realized

that's a little cold. But if you're braying and smacking your chest about your hard charging six days a week office culture, you should be able to do better than We have one publicly known customer and nobody knows our revenue. Maybe it's a little simpler. Cognition may be paid two hundred and fifty million dollars to acquire Windsurf so that you could, after the transaction say that they had eighty

two million dollars in anualized revenue. If that's the case, this is one of the dodgiest, weirdest acquisitions I've seen in my life. Two founders getting what like a few hundred million dollars between them and their investors, and a few of their colleagues moving with them to Google, leaving the rest of the staff effectively jobless or in hell

with little payoff for them time working at Windsurf. I can only imagine how it must have felt to go from being supposedly acquired by open Ai to this farcical rich get rich of bullshit. It also suggests that the actual underlying value of Windsurf's IP was around two hundred and fifty million dollars. So I ask why exactly is Cognition worth ten billion dollars? And why did it have to raise three hundred million dollars after raising hundreds of

millions of dollars? According to Bloomberg in March, where is the money going? Also doesn't seem to have revenue in general, and Carl Brown of the Internet Bugs revealed the Cognition faked the demo of Devin the AI powered software engineer last year. And Devon doesn't even rank on swe benchmark, the industry standard for model efficacy at coding tasks. Then, nevertheless, why here is based entirely on one coding language. Ah,

we'll get to that another time. At best, Cognition has now acquired their own nonprofitable coding environment and the smidgen of revenue associated with them. How would Cognition go public? What is the actual exit path for Cognition or any other generative AI startup? Because really it comes down to three things, get acquired, go public, or die. And that right there is silicon Valley's own crisis their own housing crisis, except instead of condo houses they can't afford with subprime

adjustable rate mortgages. Venture capitalists have invested in unprofitable, low revenue startups with valuations that they can never sell at, and like homeowners in the dismal years of two thousand and eight and two thousand and nine, they're almost certainly underwater.

They just haven't realized it. Yeah, Where customers were unable to refinance their mortgages to bring their monthly payments down, Generally, of AI startups face pressure to continually raise higher and higher evaluations to keep up with their costs, with each one making it less likely that their company will sell to someone else, by which I mean survive. The other difference is that in the case of the housing crisis, those who were able to hold onto their properties eventually

saw their acuity recover to pre crash levels. In part because housing is essential and because its price is influenced just as much by supply and demand as it is the ability for people to finance the purchase of properties, and when the population increases, so too does the demand for housing. A house is a useful thing that you could live in with wars and stuff. None of that is true with AI. There is a finite amount of investors, a finite number of companies, and the finite amount of capital.

And those companies are only as valuable as the expectations their investors have for them, and as the broader sentiment towards AI goes as well. Also, I should add, there is only there don't appear to be that many business models or different ones. There's so many different AI coding environments, including ones made by these companies. Amazon has their own one, now open Ai has codex. I mean, at some point can all of these things last? And who is going

to buy Cognition? Because the only other opportunity for the investors who put money into this company to make money here, let alone recoup their initial investment, is for them to go public. Do you think Cognition will go public? How about Cursor? It's worth nine point nine billion dollars. There was a rumor that was also raising an eighteen bigs million and twenty billion dollars back in June. Do you do you think that Cursor goes public or gets sold?

I mean maybe maybe one of these cells? Do you see perplexity fucking perplexity at evaluation of eighteen plus billion dollars selling to another company or going public. The alternative has discussed is that perplexity a company, if with fifteen million users and around five hundred and fifty million annualized revenue, is still making less than half of the revenue. By the way of the Cincinnati Reds baseball team, they're going

to go public. They're going to go public. Just to be clear, the Reds make three hundred and twenty five million dollars in a year. They're profitable, real money. How is Perplexity, which is an inferior business to the Reds?

How are they meant to do that? They've at this point raised over a billion dollars and they lost sixty eight million dollars in twenty twenty four and thirty four million dollars of revenue by comparison, By the way, the Reds are a great business within their income of twenty nine million dollars. Or to provide a service that upsets and humiliates millions people from Ohio every year for the

pleasure of America, that's a great business. We should respect the red So the Reds should be interviewed by Bloomberg. We should have Elie de la Cruz talking every time we hear from Sam Mortman. Just put Eli in there. He'd be way more interesting and also works harder and provides greater value as a business leader. Anyway, putting aside the reds, what exactly is it that Perplexity could offer to the public markets as a stock or to an acquirer.

Apple considered acquiring them back in June. But Apple tends to acquire companies that wants to integrate into their core business, as was the case with Siri, which makes me think that Perplexity leaked that information about a deal that was never really serious. Hell, Meta also talked about acquiring them too, and again I would assume that Perplexity leaked. That isn't it weird by the way that two different companies talked

about buying Perplexity but neither of them did so. CEO Ara vince Rivenas said in July that he wanted to remain independent, which is a weird thing to say after talking to two giant, multi trillion dollar market cap tech films about selling them to them, Like you see, to not want to stay independent, why would you have the conversation if you're you're just getting intel bullshit. It's almost as if nobody wants to buy Perplexity, or that really they don't want to buy any of these sham companies,

which I know sounds mean. But if you're worth tens of billions or a billion dollars or anything over like five hundred million dollars and you can't make more than a bottom tier baseball team in fucking Ohio, you're neither innovative nor deserving of said valuation. But really, my pissiness and baseball comparisons aside, what exactly is the plan for

these goddamn companies. They don't make enough money to survive without a continuous slow of venture capital, and they don't seem to make impressive sums of money even when allowed to burn as much as they'd like. These companies are not being forced to live frugally, or at least have yet to be made to, perhaps because they have all actively engaged as at spending as much money as possible and perceived of finding an idea that makes more money than it loses. This is not a rational nor reasonable

way to proceed. Yes, there are startups that can justify burning capital. Yes there are companies that have burned hundreds of millions of dollars to find their business models, or billions in the case of Uber. But none of these companies are like those companies in the GENERATIVEAI space. GENERALFAI businesses don't have the same economics, nor do they have

the same total addressable markets. Now, if you're gonna say Amazon Web Services, there's a three part episode The Hater's Guide to the AI Bubble that explains that, in detail, I do voices, I have sources. You need to go and listen to that. I'm fucking tired of hearing people about this one. What about Uber? What about Aws? Yeah? You got shit? That's all you've got. You certainly don't

have a company to point to. These startups are their VC firm, subprime mortgages, overstuffed valuations, with no exit route and no clear example of how to sell them or who to sell them to. The closest they've got is using GENERATIVEAI startups as beauty pageants for guys wearing Patagonia, finding ways to pretend that the guy who runs an AI startup sorry AI lab, is some sort of mysterious genius versus just another founder and just another bubble with

just another overstuffed valuation. The literal only liquidity mechanism outside of cognike that Generative AI has had so far is selling AI talent to big tech a premium. Nobody has gone or is going public, and if they're not going public, the only route for these companies is to either become profitable, which they haven't, or sell to somebody, which they're not. But I'd be dancing around the real reason they won't sell because fundamentally, generative AI does not let companies build

something new. Anyone that builds a generative AI product is ultimately just prompting the model, albeit increasingly or complex ways, at the scale of something like claud Code or though anthropic as the advantage of being one of the main veins of their infrastructure, or of course cursor. This means that the generative AI company owns very few unique things beyond their talent and will forever be at the mercy of any and all decisions that their model provider makes,

such as increasing prices or creating competing products. I know it sounds ludicrous, but this is the reality of these companies. While there are some companies that have some unique training and models and such. None of them seem to be building interesting or unique products. Is a result if your argument is that these things takes time? How long? No? Really, so many of you have said this is what happens. They burn a lot of money, they grow, and then

and then what you stop? Sure because the next thing you say is term profitable by getting enterprise customers. Nobody can do the first part, and for you can do the second part in anything approaching a consistent fashion. But really, how long should we give them? Three years? Perplexity has had three years and a billion dollars. It doesn't seem to be close to profitable. How long does Perplexity deserve

exactly four years? Five years an eternity. Every single example of a company that's burned a lot of money and then not done so in the end has been a company with a physical thing or connections to the real world, with the exception of Facebook, which has never had the kind of cash burning monstrusity that General fai Is or

Meta has now created for no reason. There has never been a software company that has just chewed through hundreds of millions or billions of dollars and then suddenly become profitable magically, mostly because the magical valuations of software have been in their ability to transcend infrastructure once unit economics in the sales of software like my Microsoft Office or providing access to Instagram do not require the most powerful graphics processing units run full tilt at all times, and

those are products that people like and want to use every day, even though both of them seem to be getting worse every minute. I get people saying that these companies are in the growth stage, but when all of them are unprofitable, and even the unprofitable ones outside of open Ai and Anthropic aren't really making much money. Come on, this isn't anything like any boom that leads to something good or you saul or profitable, and it's because the

economics do not make sense. And that's before we get into open Ai and Anthropic in the next episode. Thank you for listening to Better Offline.