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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The Power Law: A Tale of Concentrated Returns
Venture capitalists have a concept they call the ‘power law’ – the idea that the bulk of returns in a portfolio comes from just a few investments. CoreWeave, a US data-center operator that has filed for an initial public offering, offers a new variation on this theme.
The CoreWeave Story
CoreWeave provides computing capacity for companies who want to train and use artificial intelligence. Simply put, it rents out Nvidia microchips, and lots of them. CoreWeave’s 250,000-plus processors in 32 data centers are more than double what Elon Musk’s supercomputer, Colossus, had at the end of 2024. Demand is brisk: by the end of last year, revenue was growing at an annualized 170%.
A Tale of Concentrated Returns
When it goes public, CoreWeave will reflect the classic power law in that its original investors will have done very well indeed. Assume its ebitda more than doubles to $3bn this year. Pop that on the same 15-times multiple that AI ‘hyperscalers’ Meta Platforms and Amazon enjoy, strip out around $6.5bn of net debt, and the company’s equity – not including new money raised – could be worth close to $40bn.
The Risks
The catch is that the notion of big-overshadows-small, familiar in VC portfolios, manifests at CoreWeave in less helpful ways too. There’s the outsized might of a handful of suppliers. Three of them – chiefly Nvidia, presumably – supplied three-quarters of CoreWeave’s material and product purchases in 2024. Its customer base is even more skewed: Microsoft alone accounted for 62% of revenue in 2024.
The Future
Close ties to Nvidia and Microsoft are, of course, the secret sauce. But any big dependency is a valuation risk. Microsoft procures data center space not just for itself but for ChatGPT owner OpenAI. But Sam Altman’s company is also building its own giant data centers. While CoreWeave sees a nearly-$400bn market by 2028, the eventual calculus of who needs what from whom is still up for grabs.
Conclusion
This isn’t a problem for now – CoreWeave reckons it has around $8bn of revenue due over the next two years, versus less than $2bn in 2024. But unless it diversifies fast, the company’s new investors will spend much time nervously watching for signs that the relationship remains intact.
Frequently Asked Questions
Q: What is CoreWeave?
A: CoreWeave is a US data-center operator that provides computing capacity for companies who want to train and use artificial intelligence.
Q: What is the current valuation of CoreWeave?
A: The company’s equity – not including new money raised – could be worth close to $40bn.
Q: What are the risks associated with investing in CoreWeave?
A: The company’s dependence on a few big customers and suppliers is a valuation risk, and its shareholder base is lopsided, with insiders holding over 80% of the votes.
Q: How does the company plan to diversify its revenue streams?
A: CoreWeave plans to expand its customer base and reduce its dependence on a few large customers.
Q: What is the expected market size for AI data centers by 2028?
A: CoreWeave sees a nearly-$400bn market by 2028.
