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But continuing the conversation about technology, one of the next key catalysts for the AI market will be the IPO of Anthropic. The AI startup is expected to go public next month after filing an S-1 prospectus on Monday. I'm joined now by one of Anthropic's early investors, Matt Murphy. He is a partner at Menlo Ventures.
Matt, it's so good to see you . Thank you for coming to the show today. That's where I want to start. We haven't had this S-1 for a long time regarding Anthropic. We couldn't see these numbers. You have been investing in this company for a long time. You were confident, you supported them. Now that we have this S-1, what evidence do you see that there is a real stable business model here?
Almost like, what would you say to a skeptical investor? Yeah, well, I mean, it's great that the S-1 is finally here so people can make their own decisions, read the data and understand it. There were so many leaks and speculations, and people were just assuming things that weren't true. So, it's great that it's out there, and there are a lot of very smart people who can study the S-1 in detail.
But I think the things that stood out to me were, you know, the year-over-year growth rate to the second quarter, like over 10x; you know, very healthy gross profit. I think it was a pleasant surprise, you know, strong, kind of free cash flow, and stuff like that. I think they raised 140 billion and have 132 on their balance sheet.
So I know there's a lot of talk about losses, but we need to understand what is a monetary loss and what is an accounting deduction. And so, those were really the highlights, pure customer retention and things like that. So, you know, overall, the world has never seen business grow anywhere near this scale.
I thought I knew this, but now it has become more obvious to everyone. Matt, we've seen some reports, even some assumptions about the third quarter numbers that we'll get adjusted at some point before the IPO. What do you expect to see in these third quarter numbers? There were some concerns that there might be a slight slowdown.
I would like to know your opinion about what we can see there. Yes, I don't know. You know, they are in a quiet period right now, and as investors they are not disclosing these numbers either. There is a lot of third-party research that suggests that the third trimester is completely normal . And look, the overall macroeconomic situation in the market is just skyrocketing.
There are some fluctuations because OpenAI made significant discounts at the beginning of the third quarter . If you look at OpenRouter, the Menlo company being acquired by Stripe, you can see a significant share shift from OpenAI to Anthropic in the last 45 days. So just look at the data they publish, they show approximate market shares.
We are also seeing a rapid rise in the popularity of open source models as a percentage of tokens. But if you look at where the money is actually being spent , it's still mostly on basic models, core LLMs, and of course, in the corporate segment, there's more focus on Anthropic than OpenAI . So one of the things we got out of this S-1 is some hard numbers on those significant computing commitments.
What gives you confidence that the revenue and margins will allow this business to meet these computing commitments and remain profitable? Yes, I think it's all about the growth rate. Well, how can you look at a company that has grown 10x for three years in a row and suddenly say, "What if it stops growing?" I mean, you can, of course, speculate on such topics, but at first glance it doesn't make any sense.
I would say to all of us as investors in AI right now, do we think we're in the late stages of this market, or early stages? And I certainly think we're in the very early stages. So if you believe that , and we're already so big and growing so fast, it's going to take a lot of capacity to meet the demand that's coming.
Matt, you hinted at this a little bit, but this IPO from Anthropic is going to be something we've never seen before. This is the first player purely in the field of generative AI to enter the market. This is the first IPO of its kind from a company like this, so how should investors think about this IPO and Anthropic's transition from a private startup to a public company?
Yes, I mean, in terms of scale, they've definitely achieved their goal . I think this is probably the most mature startup in terms of revenue that has ever existed. So that's a real positive. I think you are dealing with the market leader. I'm sure you know that public markets love leaders. Um, and the financial figures speak for themselves.
I think we all have high expectations for AI in general, and we ask the question: how big is this market? As I said, which sectors will really stand out? You know what competition will arise over time from open source models and so on. So, as with any public offering, there are always risks that you weigh against the potential rewards of being a market leader and a company that is driving significant innovation in important , life-changing areas like life sciences and more.
I like some of the announcements they've made in the last few days regarding their operations. Matt, you've been familiar with this company for a long time . You have been familiar with its leadership for a long time. I think one of the things that really caught my attention in this S-1 was the risk factors outlined, especially words like "existential" and " catastrophic." I don't want to oversimplify things, but as an investor looking at this company, how should people perceive these disclosures in the S-1 form?
Of course. Just to be fair, I'm an early-stage venture capitalist, and this is the largest company we've ever been involved with. So I don't spend a lot of time on risk factors in S-1 reports, but I can say that this company has always been a leader and has been very concerned about trust and security issues.
This has been one of their brand messages since the beginning, ever since I met with them in early 2023, and they remain true to it. So I think that when they prescribe risk factors, they make a very comprehensive list, because they are under close scrutiny now. So, apparently, if you miss even one little thing, a barrage of criticism will come at you.
So I think it's better to be, you know, extremely meticulous about this. And I think that's something we all need to think about as investors: Okay, but what about all the amazing things that AI will help create in the world, like in the life sciences, which we talked about earlier? But also new jobs , increased productivity of people and all that kind of stuff.
And, perhaps, not enough attention is being paid to this right now. Well, Matt, there's been a lot of talk about AI adoption being largely concentrated in the tech sector. In many ways, this is certainly expanding, but I'm curious where you see opportunities for Anthropic to expand this implementation to find new applications for its technology.
Where, where can they expand? Where will this additional user base come from? Of course. You've seen AI-focused companies like Legora, which allow everyone to become a creator. Sorry, it allows lawyers to be much more productive, or Lovable, which allows everyone to become a creator. And they are big consumers of Anthropic models.
So, you have a whole bunch of startups that have grown from 1 to 100 in a year. And, you know, usually in the venture business, an ARR of 1 to 3 or 5 million is very good. So we're talking about growth rates of over 10 times. So Anthropic actually powers the operations of such companies. So Anthropic and its models are kind of the heart and soul of this industry.
And now you see how all these companies can use this and create a wide range of applications. And without Anthropic, this entire ecosystem of companies simply wouldn't exist. Another thing I would like to add: this applies to completely new startups or companies. But we haven't even begun to see the transition to new platforms in the corporate sector yet.
I think if you take Fortune 500 or 5000 companies, a lot of them are now using Anthropic as a productivity tool, and that's great. For example, cloud codes and things like that. Pharmaceutical cloud code for life sciences. But there are decades of applications written in old languages where AI is not used at all, and when you see the cycle of migrating these systems to new platforms, it will open up enormous opportunities.
I don't even know how to put it, but that's the lion's share of the IT budgets of every Fortune 5000 company, which have barely been touched yet. Matt, last question for you. This S-1 form, of course, answered many questions. But some remained unanswered. Which of these unresolved issues do you expect to see when the company goes public?
Yeah, I think we'll just see step by step how they work. I mean, let's stop speculating and just see what happens and what the real growth rate will be. Did you mention earlier whether they slowed down or not? We learn a lot about this, but the reality is that even with the slowdown, they are growing many times faster than any other company you can buy on the public market, right?
The average software company on the public market grows by 15%, and a promising one grows by approximately 30%. So the market is really concerned about growth. You mentioned some failures earlier, the fall in Intel or Amazon stocks; they fell because they did not grow as people expected, even though their growth was phenomenal.
So the market is looking for growth, and there are n't many places to find significant growth. So I think that's exactly what the market will be looking for the most. Matt, thank you for your time. We always appreciate it. Yes, it was nice to meet you.
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