Cashing in their chips

What's driving Nvidia's venture investing spree?

What’s driving Nvidia’s venture investing spree?

Last week, Nvidia (the global chip designer that’s fast becoming synonymous with Artificial Intelligence) invested in the pre-Series A round of generative AI startup Twelve Labs, their debut investment in a South Korean startup. 

It was also their 26th investment this year. Where other CVC / VC funds have pulled back on their deal numbers, Nvidia is plowing ahead and spending money like it’s going out of fashion. So what’s with the sudden flurry of deal making?

Well, as they say, make hay while the sun shines. Thanks to exorbitant demand for their AI-focused chips (such as the much coveted H100 GPU) in the second quarter of this year, Nvidia’s revenue reached 13.5Bn USD, doubling from the same period last year. For context, this is as much revenue as it used to haul in annually (as recently as 2020).

So, it’s only natural, with all that cash, that Nvidia should be spreading it around a bit, investing in their future (and making some AI friends along the way).

But here’s the rub… We don’t know whether Nvidia is investing cash in any of these deals – or if they’re investing stock, technology and services (or a combination of all of the above). It’s also worth noting that most of Nvidia’s portfolio companies are also their customers.

A cynic could argue that Nvidia is ‘round tripping’ – a nifty transaction whereby the company “sells an asset to another company, while at the same time agreeing to buy back the same or similar assets at about the same price”. In other words, the money Nvidia invests is used to buy GPUs off, you guessed it … Nvidia!

It gets even more ‘round trippy’ when you look at CoreWeave, another Nvidia portfolio company. CoreWeave specialises in cloud infrastructure for GPU-accelerated workloads. The recent boom in Generative AI has accelerated demand for their GPU Cloud to train and fine-tune models. As a result, the company has received a flood of cash – including (most recently) a $2.3Bn debt facility to “purchase compute to serve its customers”.

There’s nothing unusual about using debt to raise capital quickly, but what is unusual is that CloudWeave is using Nvidia’s much-sought after H100 AI GPUs as collateral. To summarise, Nvidia have invested in a startup, that is also a customer and a super user of their GPUs, and now these GPUs are being used as collateral for a debt facility that will be used to buy even more GPUs from (you guessed it) Nvidia … 🤔

In truth, this is probably less about financial shenanigans and more about king-making. CoreWeave’s privileged access to Nvidia chips gives them an edge on other cloud providers (Amazon, Google and Microsoft), all of whom are in the process of developing their own chips to try and end reliance on Nvidia. Even Google, which began creating competing A.I. chips more than a decade ago, relies on Nvidia’s GPUs for some of its work. By playing favourites with CoreWeave, Nvidia is creating a credible challenger to the cloud giants and fuelling future demand for its chips.

Whatever the case may be, Nvidia isn’t the first semiconductor company to use venture to stimulate the development of the ecosystem in which it operates. Intel Capital, the investment arm of the semiconductor giant, is the original gangster!

Back in 1991, long before corporate venture capital was in vogue, Intel realised it could benefit from enabling startups that made complementary products. Fuelling their demand could stimulate demand for Intel’s own microprocessor products. So, Intel invested in hundred’s of companies whose products would require increasingly powerful microprocessors, thereby driving sales for Intel’s chips.

They’ve since invested >$12Bn in >1,500 companies in >55 countries. Nearly 700 portfolio companies have gone public or participated in a merger – its best known investments include VMware (VMW), Citrix Systems (CTXS), Cloudera (CLDR), DocuSign (DOCU) and MongoDB (MDB).

It’s fair to say the ‘growing market strategy’ worked for Intel, but will it work for Nvidia? Is their venture frenzy a short-lived effort to capture market share before they lose momentum or are they establishing themselves as the Wizard of Oz for the AI industry as a whole? Only time will tell!

Till next month …