To expand on the financial jargon: This is due to Anthropic having issued convertible bonds to investors. Convertible bonds are popular for investing in startups. An investor can loan a company...
To expand on the financial jargon:
This is due to Anthropic having issued convertible bonds to investors. Convertible bonds are popular for investing in startups. An investor can loan a company $10 million, say, with an option to convert it into stock, which they will do if the stock is worth more than $10 million plus whatever interest the bond pays. So if the company does badly, the convertible bond is a debt owed to early investors. If the company does well, it's stock.
Since Anthropic's valuation has increased so much, investors will almost certainly convert it into stock, because it's far more valuable that way. Since they're not stock yet, they are on the balance sheet as debt, and the liability grows when the company's valuation increases. But it's "debt" that the company will never have to pay. Instead, shareholders will be diluted due to there being more stock issued. Economically, it "should" be treated like a stock option, but it's not due to accounting rules.
Not all convertible bonds are accounted for in this way, but Anthropic's convertible bonds apparently are for some reason.
I can't read this article or the Wall Street Journal article, but I'm curious if they explain this in any more detail.
And there will inevitably be a lot of noise from Internet commenters who don't understand convertible bonds or what an "accounting charge" means and see it as a real loss.
[Edit: clarify that the debt is owed to the investors.]
My understanding of this explanation comes down to "investors are trying to get in a good position and hoping the IPO makes them big money". So... it depends on Anthropic having a good IPO (plus...
My understanding of this explanation comes down to "investors are trying to get in a good position and hoping the IPO makes them big money". So... it depends on Anthropic having a good IPO (plus whatever vesting period is needed) to know if this is a good or bad move?
From the sounds of things: unlike normal stocks with protections against "going into debt", this one removes such protections in exchange for a bigger potential payout. So if this doesn't go super well, it's going to cost investors dearly.... or probably not because there's a dozen other protections to catch them.
The investors that own convertible notes are likely fine in almost any circumstances. If things don't go well, the risk is like owning a bond. The debt is owed by Anthropic to the investors. The...
The investors that own convertible notes are likely fine in almost any circumstances. If things don't go well, the risk is like owning a bond. The debt is owed by Anthropic to the investors. The only way they wouldn't get their money back is if Anthropic went bankrupt.
Why did the investors get such good terms? If it's like other startups, it's because they got in early, before anyone knew how big Anthropic would be. They gave Anthropic money back when it needed money and there was a risk it wouldn't make it. But at this point, for all early investors in Anthropic, it's just a matter of how great an investment it will turn out to be, because they got in at a very low price.
(For investors buying during the IPO, the risks are different, because that's a much higher price.)
Oct 20 (Reuters) - Anthropic's net loss widened sharply to $80.7 billion in the first half of this year, in large part due to a rise in the fair value of bonds convertible into shares of the AI startup, according to a draft prospectus for a planned initial public offering that was reviewed by Reuters.
Its first-half loss, widening from a loss of $13 billion a year earlier, included a $72 billion accounting charge reflecting an increase in the estimated value of bonds that could eventually convert into Anthropic shares, rather than cash costs tied to its operations, the document said.
While the figures eased some concerns about the enormous costs of developing AI systems, some investors were disappointed by the slowing sequential growth rate. Revenue had more than doubled from the first quarter to $11.6 billion in the second quarter.
Here's the direct reporting from Wall Street Journal. The highlight is the massive spike in debt->stock conversions. It's looking to be a big problem given the very impressive revenue numbers from...
The highlight is the massive spike in debt->stock conversions. It's looking to be a big problem given the very impressive revenue numbers from other legacy tech companies like Alphabet, Amazon and Nvidia. A significant amount of their revenue is a direct result from their stakes in the AI labs and that's distorting a most of their reported figures. Bare in mind, in Q1 alone, this is about $70bil of collective profits (at Alphabet, Amazon and Nvidia) that's not from doing any business (selling ads, chips, licenses, cloud services...), but from the speculation on the unrealized gains. If you had to remove this (speculative) valuation boost and the average earnings are right back down to expected growth projections of 15-16%.
To expand on the financial jargon:
This is due to Anthropic having issued convertible bonds to investors. Convertible bonds are popular for investing in startups. An investor can loan a company $10 million, say, with an option to convert it into stock, which they will do if the stock is worth more than $10 million plus whatever interest the bond pays. So if the company does badly, the convertible bond is a debt owed to early investors. If the company does well, it's stock.
Since Anthropic's valuation has increased so much, investors will almost certainly convert it into stock, because it's far more valuable that way. Since they're not stock yet, they are on the balance sheet as debt, and the liability grows when the company's valuation increases. But it's "debt" that the company will never have to pay. Instead, shareholders will be diluted due to there being more stock issued. Economically, it "should" be treated like a stock option, but it's not due to accounting rules.
Not all convertible bonds are accounted for in this way, but Anthropic's convertible bonds apparently are for some reason.
I can't read this article or the Wall Street Journal article, but I'm curious if they explain this in any more detail.
And there will inevitably be a lot of noise from Internet commenters who don't understand convertible bonds or what an "accounting charge" means and see it as a real loss.
[Edit: clarify that the debt is owed to the investors.]
My understanding of this explanation comes down to "investors are trying to get in a good position and hoping the IPO makes them big money". So... it depends on Anthropic having a good IPO (plus whatever vesting period is needed) to know if this is a good or bad move?
From the sounds of things: unlike normal stocks with protections against "going into debt", this one removes such protections in exchange for a bigger potential payout. So if this doesn't go super well, it's going to cost investors dearly.... or probably not because there's a dozen other protections to catch them.
The investors that own convertible notes are likely fine in almost any circumstances. If things don't go well, the risk is like owning a bond. The debt is owed by Anthropic to the investors. The only way they wouldn't get their money back is if Anthropic went bankrupt.
Why did the investors get such good terms? If it's like other startups, it's because they got in early, before anyone knew how big Anthropic would be. They gave Anthropic money back when it needed money and there was a risk it wouldn't make it. But at this point, for all early investors in Anthropic, it's just a matter of how great an investment it will turn out to be, because they got in at a very low price.
(For investors buying during the IPO, the risks are different, because that's a much higher price.)
Here's the direct reporting from Wall Street Journal.
The highlight is the massive spike in debt->stock conversions. It's looking to be a big problem given the very impressive revenue numbers from other legacy tech companies like Alphabet, Amazon and Nvidia. A significant amount of their revenue is a direct result from their stakes in the AI labs and that's distorting a most of their reported figures. Bare in mind, in Q1 alone, this is about $70bil of collective profits (at Alphabet, Amazon and Nvidia) that's not from doing any business (selling ads, chips, licenses, cloud services...), but from the speculation on the unrealized gains. If you had to remove this (speculative) valuation boost and the average earnings are right back down to expected growth projections of 15-16%.