An IPO adviser on why Anthropic is buying compute before the revenue exists | Sozzi Unleashed

managing partner of the Connor Group, Jim Niss, who I've been talking to a lot about all things deal activity. We just talked, Jim, a couple weeks ago in the leadup to this anthropic IPO. Um, what are some of your thoughts now that you've digested, I guess, all 407 pages. >> It was a a thrilling read. You know, I think three things really sort of jumped out to me. I mean, first off, you know, this is the fastest growing revenue company ever to go public. that really sort of jumped out. I think the second piece is, you know, for public investors, this is the first pure play AI that is really part of a multi-deade trend that you can get access to and that's really sort of compelling. I think the third is this was kind of a mixture of what I call business and party. The financials were a lot stronger than we thought. You mentioned the cash numbers. you actually have an operating income when it's adjusted and you have a business rate that sort of uh the margins are impressive and only going to improve. So there was a lot here for people to not only digest but get excited about and be on sort of that bull side of the business. >> Jim, out of everything I put out on X after I read all 47 pages with inside of 10 minutes, the one thing that got the most play was I posted a photo of all of the founders. I believe they're seven and their voting structure and uh how important they will be uh in life after going public philanthropic got so much play a ton of views and what do you think about the concentration of power in these seven co-founders is that a good thing or a bad thing >> any IPO you've seen this is a public benefit company so two things number one you have the seven investor or seven sort of founders that have 50.1% you have a board that will be uh approved by sort of a trust fund And then you also have, you know, a business where it's not just going to be about profits. There's also going to be sort of the social benefit piece that's sort of built into their doctrine. I would say having seven uh sort of founders working together can make it where it's not just like a a cult of Elon Musk, right? You actually have it where you have a consortium of people making decisions, which I actually think can be a good thing. >> Well, it can also lead to indecision. Too many cooks in the kitchen. >> Yes. >> Yeah. it. >> I mean, look what Elon has been able to do uh just by being that sole voice. I mean, these guys putting out flying cars. >> You're gonna have to navigate that. No doubt, right? I mean, if you look at sort of Meta, you also look at Google, you had very strong founders. A lot of times that is the VC case. I want founders that can make strong decisions and not be beholden to sort of quarterly type of trends. This is going to be a different type of structure out there. Um, and it's going to be tested. We've never seen it especially at this scale especially at these growth rates. So uh I would say that's one thing uh analysts and investors going to be looking very closely at. >> I you've been doing this for a long time Jim and I you know the board for anthropic re Hastings my man Bos from Novartis I mean these are experienced executives but my question is this is the board big enough given the importance of anthropic to the world. Well, you will see sort of some changes uh with the board as they go public. Typically, they'll bring in some more independent board members as well. Um I do think this is a strong board that has the ability to manage these really unique decacorns, right? These companies that are absolutely changing the faces of industry, but also uh in terms of the economy, we will see some change as well, no doubt. And that'll be sort of to the leadup of the IPO and then probably even as it manages as a public company. >> What what makes what would make an ideal board member for a company like this? Um look, we we haven't really seen a company like this per se come to market before. >> Yeah, you know, you have these dynamics of profitability, growth engines, margins, but also big bets. Um, there's a big psychology a board member needs. They have $600 billion dollars of compute obligations out there. And I kind of think of it like they're sort of it's like stocking the shelves for Christmas with inventory, right? You know, they're actually stocking this compute inventory because they're betting on the revenue coming in the future. You need to have an a psychology where you can manage big numbers out in the future that are going to be expected in the marketplace, but also making some big bets because you want to make sure that compute expenses as low as possible to drive profitability. This will look like a software company, right? 70 80% margins at the end of the day. You need board members who can really be part of that calculus and advise strategically the executive team. >> What corporate governance red flag stood out to you? You know, I I think a couple things we need to really sort of look at. I think one, you mentioned sort of the ownership structure. I think the second is going to be this mix of profitability, but also what is for the public good, right? We're in this unchartered AI world where there are a lot of things. I mean, you look at the S1 and you see the risk they're talking to humanity and possibly to even sort of, you know, destruction out there. >> Jim, I've never seen that before. I've been doing this for over 20 years. I've never even I don't think I've ever seen the word humanity put in a 10K, 10 Q, 8K, S1, and maybe like 40 other types of filings I'm forgetting about. Absolutely. Absolutely. And I think that is the tension here because the company will be measured quarterly in a lot of ways by certain investors. They have a TAM which might be and they haven't published it yet. I'm expecting sort of north of 10 trillion, 20 trillion, right? I think SpaceX said the AI is is over 29 trillion. So you're going to have this tension that this governance structure is going to have to really manage carefully. How do you think about profitability? How do you think about investor returns? How do you think about public benefit? >> And how should investors think about the finances of anthropic? Because a couple pages in you had them showing $80 billion loss, but then right under it, >> this is suddenly a profitable company when you adjust for this, this, and this. >> Yeah. you know, and I think that's why you need to sort of dig into this. The $80 billion loss was a headline, but it's not really a loss, right? And the reason is because they have these non-cash expenses that are tied into uh into equity. So, that's why they do adjusted. It was very impressive that they have an operating income of almost $2 billion and they've had this sort of 30x increase in quarterly revenue over 18 months. We have never seen that before. So I think that's a really important piece that we sort of need to understand and dig into. Uh this is a business that has some mature aspects of their financials, but it is a high growth rocket ship as well combined together. That's what makes this so compelling and why it's going to be the biggest IPO probably that we may see in our lifetimes or at least up till now. >> So what should the average investor do, Jim, when this comes out? They're going to want a piece of it. I I just I see the questions. I just I know this is all coming at me, Jim. How should they should they ignore GAP financial results from Anthropic and just focus on the positive fluff they're likely to blow in our face? >> Well, I I would actually say that there's a lot of rigor behind that. I would say operating income is a very [clears throat] very important number because what happens is that's what you can sort of connect dot uh sort of data points out to what it looks like in the future and what future revenue and future earnings may look like. So, I wouldn't say it's fluff. I actually think there's a lot of rigor behind that. I think the average investor there's a couple things. Number one is this is a long-term play. And I think that if you are believe that this is a multi- uh decade type of trend that is going to be changing the face of almost every type of industry. This can be a very compelling investment to get involved in early. There won't be a pure play company like this. Open AAI is the closest. I think the other comment I'll make too is that this is going to be part of a wave of AI companies looking to go out in 27. There are a lot of really exciting companies that have been waiting for this. This is a part of a bigger trade out there, but this is something that only happens once when it actually goes public. >> What does this mean? You mentioned more AI companies coming to market next year. What does this mean for OpenAI? On the one hand, it looks like the anthropic perspectus is being wellreceived. Like I mentioned to here, there's a lot of positives in that and you and I are talking about it too. That could be good for the valuation on OpenAI. However, >> now they're going to come out and Anthropic is going to have a bunch of investors. People already own that story. Why would they want to own essentially a similar company like OpenAI? >> Yeah. You know, I think they're they have some different differences in their businesses, right? Uh Anthropic is a bit more of a commercial business, right? you have both sort of the consumption model, the subscription model, but you have companies and enterprises that are embedding it in terms of all their business processes. Open AAI is starting to get some of that market share. So, I think this private round that they're doing, you know, um at sort of a very large valuation, right? We're seeing rumors of maybe 1.25 trillion uh raising, you know, maybe 50 60 70 billion allows them to start to get some more market share. I think this is a large market. That's why that TAM 10 20 trillion plus a lot of companies will be able to play there. However, we really do believe that there'll be a few companies that have the majority of the market share. We see that happen a lot in these sort of nent industries that explode. There there is room for both these companies, but they are going to be competing no doubt with some of those other large companies out there like SpaceX uh and others. Are investors going to give in Open AI and Enthropic and a lot of these other AI companies coming to market likely next year the benefit of the doubt like they used to give Amazon when they were hemorrhaging money and spending a lot on cash even Netflix too. Basically Anthropic is going to come to market losing money probably open AI to a lot of other ai companies as well. How is the market you think going to receive that? Yeah, I think the market's going to do this analysis on we mentioned about those commute uh compute obligations is how much money are they committing to the future that is a big risk in this S1 and we should be very clear about that because they're betting that their future revenue growth and their ability to raise capital will be able to cover those costs now to date and if you look at their growth rates right 15x is being reported but let's say it'll sort of moderate to 10x that will be the sort of big uh calculus question that everyone has to do is how much do they need to buy into the future to be able to service their revenue forecasts. I think investors absolutely in the beginning will give that sort of a lot of leeway and latitude because we're in uncharted waters and the company with this S1 demonstrated that they're doing that. The next data point will be their Q3 numbers. Those will come out quickly uh after they go public. There will also be whispers of what their full year will look like. We think they're going to be about 40 to 45 billion in revenue run rate. I think that really suggests that this business is taking off and that their compute obligations they can manage them. >> Jim, real quick, as you were reading the anthropic perspectus, was there one thing that surprised the hell out of you? >> You know, I I would there were a couple things. I think number one, um they five to 7% of their revenue is from companies that are not fully complying with their policies. That was really interesting them calling that out. So I think that's one thing that really sort of uh uh we should sort of take note to. Uh I think the other thing is um you know they have uh this sort of business uh where they need to really sort of think about how are they partnering with other types of AI companies out there. You mentioned sort of that SpaceX connection. They have connections into Microsoft and Amazon, right? You have this tension between sort of competitiveness and collaboration in the market. uh uh sort of never been seen before in capitalism times.