Nvidia and the Neocloud Gold Rush
Hands up if you’ve got a neocloud going up in your backyard! I’m joking, of course, but it almost feels like some people must be putting AI chip servers in their gardens, given the rush of people wanting to start a neocloud business. (That’s the tech world’s term for firms that rent AI servers to others.)
SoftBank on Thursday announced the creation of a U.S. neocloud venture, joining hundreds of other firms now crowding the sector. Funding still appears to be plentiful: A bunch of the younger neoclouds have raised venture funding in recent days, most recently Together AI’s $800 million fundraising unveiled on Wednesday. Meanwhile, Nvidia, which makes the dominant AI chip, is promising to financially backstop younger cloud firms in exchange for a share of their revenues, we reported on Wednesday night. Nvidia’s move raises the question of why neoclouds need a backstop if demand for computing capacity is so intense.
The answer is straightforward: Nvidia, conscious that Amazon and Google are offering alternatives, wants to ensure that demand for its AI chips remains robust. And many of the younger neoclouds are too small to borrow money on their own. The issue is that Nvidia’s financing efforts may be increasing the risks of overbuilding, at least for smaller players.
Long-established cloud firms Amazon Web Services, Google Cloud and Microsoft Azure, plus newer players like CoreWeave, are experiencing so much demand they’re spending a fortune to build more capacity. Other big firms, such as SpaceX’s AI unit, have joined the market. Meta Platforms has signaled in recent months it might also jump in, at least temporarily. Is there enough demand to go around for all these firms plus hundreds of tiny ventures?
There’s a good chance some of the newer entrants will stumble, if only because they’re inexperienced and will struggle to deliver a service at the standard customers expect. Those most at risk of losing money may be the venture backers of smaller firms. Ironically, CoreWeave, which is financing its expansion with debt, has less risk given that its financing is tied to customer contracts.
While venture investors may stand to lose the most, Nvidia is arguably taking on unnecessary risk. Sure, it has deep pockets and probably can reallocate its chips if necessary. But could it be going overboard in its efforts to ensure demand for its chips remains alive and well?