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The majority of new revenue revealed by Oracle will come from OpenAI deal, sources say

OpenAI signed a contract to purchase $300 billion in computing power over roughly five years from Oracle ORCL 35.78%increase; green up pointing triangle, people familiar with the matter said, a massive commitment that far outstrips the startup’s current revenue.

The deal is one of the largest cloud contracts ever signed, reflecting how spending on AI data centers is hitting new highs despite mounting concerns over a potential bubble. It will require 4.5 gigawatts of capacity, roughly comparable to the power produced by more than two Hoover Dams or the amount consumed by about four million homes.

Oracle shares initially surged by 42% on Wednesday after the cloud company revealed it added $317 billion in future contract revenue during its latest quarter that ended in Aug. 31. Chief Executive Safra Catz told analysts that it had signed contracts with three different customers during the quarter.

The share price surge increased Oracle Chairman Larry Ellison’s wealth by more than $100 billion, pushing him into the range of Elon Musk as the world’s richest person, with a net worth of almost $400 billion.

The OpenAI and Oracle contract, which starts in 2027, is a risky gamble for both companies. OpenAI is a money-losing startup that disclosed in June it was generating roughly $10 billion in annual revenue – less than one-fifth of the $60 billion it will have to pay on average every year. Oracle is concentrating a large chunk of its future revenue on one customer—and will likely have to take on debt to buy the AI chips needed to power the data centers.

Oracle gave a first hint of the deal when it disclosed in a June filing it had struck a cloud services agreement that would give it more than $30 billion in annual revenue starting in 2027. The cloud giant will receive more yearly revenue from OpenAI over time as more data centers come online.

The deal rests on the assumption ChatGPT will continue its explosive growth and be adopted by billions of people across the world, as well as major businesses and governments. While the startup’s growth has been nothing short of extraordinary, it is also facing mounting pressures including an expensive talent war, tense negotiations with Microsoft, and a for-profit restructuring that is being reviewed by regulators in two states.

OpenAI is trying to reduce a computing shortage that is hampering the roll out of its products and constraining progress building new AI models. The startup tried to solve the problem by launching a new data-center venture called Stargate with one of its largest backers, SoftBank, but that project has gotten off to a slow start. OpenAI has since said that Stargate is the brand for all of its data-center efforts and considers the Oracle deal a part of Stargate.

OpenAI for years relied on Microsoft to exclusively provide its computing power, but recently received waivers allowing it to find new providers after growing frustrated with supply shortages.

The vast majority of new revenue revealed by Oracle will come from OpenAI deal, sources say

OpenAI signed a contract to purchase $300 billion in computing power over roughly five years from Oracle ORCL 36.93%increase; green up pointing triangle, people familiar with the matter said, a massive commitment that far outstrips its current revenue.

The deal is one of the largest cloud contracts ever signed, reflecting how spending on AI data centers is hitting new highs despite mounting concerns over a potential bubble. It will require 4.5 gigawatts of capacity, roughly comparable to the power produced by more than two Hoover Dams or the amount consumed by about four million homes.

Oracle shares surged by 42% on Wednesday after the cloud company revealed it added $317 billion in future contract revenue during its latest quarter that ended in Aug. 31. Chief Executive Safra Catz told analysts that it had signed contracts with three different customers during the quarter.

I contend most AI investments will again lose money. But, again, given the size of the opportunity in AI transformation, more money will be made than lost, even more asymmetrically than in the past technology transitions. The bigger the transition, the bigger the opportunity and the bigger the bubble. The key is to be invested in one or more of the “megacorn alpha dogs”. And what matters is not the exit valuation but the multiple on investment, weighted by the dollars invested at each multiple.

There are many companies today with valuations, even seed valuations, in the billions.

Just in the western world, mostly the U.S., the major AI models: OpenAI, Anthropic, Sakana, Cohere, Adept, Character, Inflection, Scale, xAI, Mistral, Stability, Perplexity, Thinking Machine Labs, SSI …. the major coding companies: Cursor, Cognition, Replit, Lovable, Windsurf, Poolside, … the major robotic companies: Figure, 1X, Pi, SkillD, FieldAI, Rhoda, Agility,… the major self-driving companies: Waymo, Waabi, Aurora, Cruise, … the early enterprise, media and healthcare winners: Abridge, Sierra, Decagon, Glean, Sword, Hippocratic, Ambience, Runway AI, Eleven Labs, Synthesia, Databricks, Andruil, … And then there are the >$100 million “entry” valuations galore. In a market with 95% losing investments and 5% winning valuations, one grossly needs to get to 40X multiple on a big win to get a 3X net or 4X gross on the fund. Usually, the higher the valuation the higher the dollars invested by venture funds so weighted multiples are even harder to get with larger late stage investments. Usually later stage investments have a lower “fail” ratio so the math works. In AI the historical late stage “fail ratio” might not be true.

What does this say about valuations? Capital concentration is extreme: the largest rounds are in foundation models, compute/infra, defense, and (more recently) humanoid robotics, with valuations that rival or exceed historic IPO peaks. There will only be a few winners. Healthcare, coding, and enterprise search are the next densest clusters of unicorn/decacorn deals. I suspect there will be more winners but they will be smaller in IPO valuations or M&A exit valuations than their current valuations. Many of their later rounds may not get returns.

Power-law reality check: Empirical datasets show that a small fraction of investments drive the majority of returns (e.g., ≈6% of deals generated ~60% of VC returns in Horsley Bridge’s long-run sample). AI investments, especially multiple, may be even more lopsided given the high entry valuations for investors.

For venture fund limited partners (LPs) there is the urgent matter of DPI vs TVPI.

DPI (Distributions to Paid-In Capital) is the “How many dollars have we gotten back for every dollar we’ve put in so far?” TVPI (Total Value to Paid-In) equals distributions to LPs plus net asset values divided by capital paid in by limited partners. Many limited partners have discovered that DPI is truth-in-cash. It can’t be marked up. It only moves when assets exit and proceeds are distributed (cash or in-kind stock at distribution-date value). In-kind public stock or cash distributions lock DPI at distribution date; post distribution stock price movements are outside DPI so they don’t impact DPI. TVPI is a mostly hypothetical mark, especially in an inflated valuation environment — exactly where cycles (like 2024–25 AI) can inflate numbers. If DPI is low but TVPI is high, returns are still largely fictional paper returns and can decline dramatically.

Limited partners during the last two years are focusing mostly on DPI and clamoring for it. Very few funds are meeting LP thresholds on this metric and that is bad news for the venture business, both for limited partners and general partners. As (and if) the cycle normalizes over the next ten years, venture capital allocations will decline, venture fund raises and investments will decline, and innovation will be starved of capital (as is currently happening in biotech investments). Enthusiastic and naive efforts like $100 billion “venture funds” and abundant tens of billions of Middle East money funded easy “AI fund” raises will do a second take. Yes sir!

Yet, society will see massive transformation. Trillions of wealth will be created and AI-driven societies, those that choose to transform, will be much better off, especially the bottom half of the global population.

So what is an investor to do, be they a venture firm, a limited partner or an individual investor?

How does one underwrite paying up? Bet on the long run and long-term value creation, not short-term TVPI. Access to the best investment opportunities will be through the best, yet more cautious, venture firms. These are hard for investors to get into except when they raise super large funds. Be cautious. For every billion dollar pre-money valuation investment that is worth making, there are many many billion dollar valuation investments that are not worth making.

Highly selective and nuanced decision making on these assessments are skills hard to come by. It is a very hard skill to get right and we continuously doubt our own decisions. Firms that are highly selective but not overly valuation sensitive in what they invest in will do well, not those who are only looking for bargains. Bottom line: Bargain hunting will be a poor bet in AI. But firms “putting money to work” who invest in all high valuations indiscriminately will do poorly and that is the majority of investing that is happening. This danger will come home to roost in five to seven years in realized returns and DPIs.

Agreement comes after UK, France and Germany triggered mechanism to reimpose UN sanctions later this month

The UN nuclear watchdog and Iran have made a preliminary deal to resume co-operation over the country’s nuclear facilities, including those targeted by the US and Israel in June, after Tehran halted international inspections following the war.

Rafael Grossi, director-general of the International Atomic Energy Agency (IAEA), told the agency’s board of governors on Wednesday that the renewed co-operation would be conducted “in a comprehensive way”, calling it “an important step in the right direction”.

Britain, France and Germany began a process in late August that gave Iran 30 days to take various measures — including complying with the IAEA — or suffer renewed UN sanctions.

Iranian foreign minister Abbas Araghchi, who signed the agreement with Grossi in Cairo on Tuesday, said the deal would not immediately allow the IAEA into Iran’s nuclear sites, and that the terms of access would be decided in future talks. 

Grossi said the deal “provides for a clear understanding of the procedures for inspection, notifications and their implementation”. It included “all facilities and installations in Iran and it also contemplates the required reporting on all the attacked facilities”, he said.

He did not provide further details but said Iran had no intention of leaving the non-proliferation treaty, despite western fears that mounting pressure could push Iranian leaders towards quitting the pact.

Israel attacked Iran’s main nuclear facilities at Natanz, Fordow and Isfahan during the 12-day conflict in June, and killed dozens of senior military commanders and nuclear scientists. The US joined in with bunker-buster bombs, which President Donald Trump claimed “obliterated” the nuclear sites.

However, the extent of the destruction is unclear, as is the whereabouts of more than 400kg of highly enriched uranium that was believed to have been stored in the enrichment facilities, but may have been moved by Iran before the attacks.

In response to the conflict, Iran suspended co-operation with the IAEA, and its parliament passed a law stipulating that inspections could only resume with special permission from top security bodies.

Britain, France and Germany — long frustrated by Iran’s expanded nuclear activities and lack of co-operation with the IAEA — last month triggered a “snapback” mechanism under the 2015 nuclear deal, giving Tehran a month to resume compliance with the IAEA, alongside resuming negotiations with Washington over its nuclear programme.

Araghchi warned that Iran would halt co-operation if the countries proceeded with UN sanctions.

Grossi acknowledged the challenges ahead but expressed hope that the deal “may serve as a good sign . . . that nothing replaces dialogue”.

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