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Investors’ $20 Billion Bet On The ‘NeoClouds’ Driving The AI Arms Race

Dec 27, 2024 - forbes.com
Over the past year, a group of startups specializing in hosting and renting GPUs, essential for AI development, has seen significant investment, raising around $20 billion. Companies like Vultr and Coreweave have emerged as leaders in this sector, with Coreweave achieving a $23 billion valuation. These startups, often referred to as "neoclouds," offer lower-cost GPU access compared to giants like AWS by providing "bare metal" GPUs without additional software. This cost advantage has attracted major clients, including Microsoft and Oracle, who face capacity constraints in their data centers.

Despite the rapid growth, challenges loom for these startups, including fundraising difficulties and the complexities of managing data centers. There are also signs of softening demand for AI chips, with some startups reducing prices and advertising available GPUs. The potential for a chip glut, combined with debt-fueled expansion, poses a risk, particularly for smaller players. Analyst Dylan Patel warns that many of these neoclouds may face bankruptcy as the market evolves.

Key takeaways:

  • Startups that rent GPUs for AI tools have raised significant funds, with Vultr achieving a $3.5 billion valuation and Coreweave reaching $23 billion.
  • Investors have poured $20 billion into companies renting GPU access, with $8 billion in equity and $12 billion in debt.
  • Neoclouds offer lower prices by selling "bare metal" GPUs, attracting AI startups seeking cost-effective solutions.
  • Despite growth, challenges include potential bankruptcies due to debt-fueled expansion and a possible chip glut.
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