Anthropic is in Talks for another $750 Million in Funding and a 4.5x Rise in Valuation
The leading alternative to OpenAI is looking to secure that position
The Information and CNBC have reported that Anthropic is in advanced negotiations with Menlo Ventures and other institutional investors to raise another $750 million. While Anthropic has recently sought a valuation of over $20 billion, the expected investment valuation is $18.4 billion.
Founded by former engineers at OpenAI, Anthropic raised $124 million in Q2 2021, followed by $580 million a year later. In the first quarter of this year, the company raised $300 million, and then another $450 million in the second quarter.
Funding Ramp
This represented an impressive funding ramp through the first half of the year, especially considering the Q2 2023 funding included $300 million from Google, a large language model competitor. Financial Times reported that the investment round secured Google “a stake of about 10 percent in the start-up.” That suggests the valuation was near $3 billion in the first quarter of the year per the Financial Times, and the $4.1 billion valuation from the second quarter for the subsequent funding round, according to CNBC reporting.
However, these rounds were merely the warm-up. Anthropic followed the announcements with an “up to” $4 billion commitment from Amazon for “a minority stake” in the business. This means the company’s valuation, as set by investors more than doubled between May and September. Amazon apparently invested $1.25 billion in September, with the balance based on performance metrics.
Concerned about being outmaneuvered by cloud computing rival AWS, Google returned a month later and committed another “up to” $2 billion to Anthropic. Both of those deals are based mostly on free or heavily discounted use of cloud computing resources. So, it’s not as if Anthropic backed an oil tanker up to the bank and started depositing cash. What they did was sell equity for the cost of future expenses. The exception is that Google’s latest investment included $500 million in cash, per CNBC reporting.
The “pre-paid” cloud computing expenses will enable the company to train models and conduct inference for customers using its LLMs. The Information suggests this is expected to reach $7 billion in cloud computing bills over the next five years based solely on the deals with AWS and Google Cloud.
The most recent round of $750 million is likely to be separated into tranches but will come from investors that provide cash as their investment. That cash can be used to hire high-priced AI research and engineering staff, build out a large enterprise salesforce, subsidize the cost of running the Claude chatbot, and introduce new applications riding on top of the LLMs. Menlo is expected to invest $400 - $500 million in the round.
Revenue Ramp
Accompanying the stratospheric funding ramp is a rapid rise in revenue. The Information reported that:
The 300-person company has told investors that it would generate revenue at a $200 million annualized pace by the end of this year, as of October, The Information previously reported. By the end of 2024, Anthropic sees revenue hitting a $500 million annualized rate.
While these numbers suggest very aggressive multiples of revenue to valuation, they also represent impressive growth, even if some of it is merely forecasted. It is uncommon for a company to go from close to zero revenue to $200 million in two years and $500 million a year later.
The $200 million to $500 million run rate suggests this year’s revenue is probably above $50 million for the 2023 calendar year, while 2024 is expected to be north of $300 million. This is the difference between looking backward and looking forward, but it is a more common way to understand where the company is today versus where it is headed. Either way, the numbers are large regardless of the eye-watering valuations.
The OpenAI Alternative
Anthropic, Google, and Meta are the leading contenders to become the primary alternative to OpenAI for enterprise buyers. OpenAI’s management turmoil in November has made this position even more valuable. Every market wants an alternative to a leader. If you ever want to be the leader, you often need to become the primary alternative first and then build into the leadership position.
Google would seem an obvious choice and certainly will have a big LLM business. However, it recognized that an independent foundation model developer like Anthropic could secure significant market share. Its de facto anointment by AWS as the cloud provider’s premium LLM ensures it has a big opportunity for customer acquisition. Assuming the latest funding round comes through, Anthropic will have plenty of cash to invest in that opportunity.
The company’s new Claude 2.1 model with a giant 200k context window combined with expanded legal protections for copyright indemnity round out what looks like an attractive package for enterprise buyers. It is also attractive to some financial investors who expect a decacorn to get much larger.
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