Patrick McKenzie (patio11) is joined by returning guest Zvi Mowshowitz, AI watcher extraordinaire, to read Anthropic’s S-1 and what it shows about the AI industry. They cover a founder-controlled structure built on a single Class F share that holds 50.1% of the vote, an uncapped 3:1 employee donation match that may be the most expensive perk ever offered, and about $900 billion in forward compute commitments. They also discuss why softer Q3 revenue points to a shortage of GPUs rather than of customers, the bubble and circular-financing bear cases, and who should be blamed when AI-assisted hackers take $5 billion from Binance.
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(00:00) Intro (01:35) How the S-1 talks about existential risk (07:45) Anthropic has long had an attitude (12:20) Anthropic’s uncapped donation matching (14:18) Postscript: what the matching program will actually cost (16:00) Sponsor: Mercury (18:29) Revenue growth and cohort economics (22:25) Postscript: Q3 was a supply story, not a demand story (24:55) Is it a bubble? (28:27) Sizing the market for tokens (31:02) The commodification bear case (31:56) Cash efficiency and $800 billion in compute commitments (36:44) Postscript: what happens if the commits go bad (39:20) Flexing compute between training, inference and subleasing (43:37) Reading an S-1, with and without an LLM (46:49) Circular financing and the dot-com comparison (50:08) Wall Street versus the tech industry (52:02) The three AI pills (54:53) Industrial revolutions and how weird the future gets (57:31) AI mathematics and the bitter lesson (01:00:52) Capabilities nobody trained for (01:04:40) Capabilities versus diffusion (01:07:12) Token spend at the frontier (01:09:09) Final thoughts on the S-1 (01:11:48) The hackening and who bears responsibility (01:17:49) Trapdoors and irreversible decisions (01:19:12) Wrap
Transcript
Patrick: Welcome to Complex Systems, where we discuss the technical, organizational, and human factors underpinning why the world works the way it does.
Hideho, everyone. My name is Patrick McKenzie, better known as patio11 on the internet. I'm here with multi-time guest Zvi Mowshowitz . Thanks very much for coming on.
Zvi: Glad to be back. Yeah, I always enjoy it.
Patrick: So we're discussing the Anthropic S-1 today, and the larger window that it shares on the AI industry.
And because we are professionals discussing professionally adjacent topics, we have to start with the boring parts, similar to the boring disclaimers in an S-1. I don't believe I own stock in any of the labs. I don't invest in publicly traded tech stocks except through ETFs that are broadly market-tracking. [ Patrick notes : You don’t come to me for investment advice, and that is a good thing, because this has been a really poor decision for the 20+ years I’ve been in tech.]
I have a career in the tech industry, which is getting drawn into the gravitational well of the labs right now and the other parts of the AI supply chain, and you should assume I'm conflicted up the wazoo in that fashion. But I think I'm trying to be a reasonably responsible person talking about this company, and I think that's all for me.
[ Patrick notes : To be slightly more explicit: I am socially connected to many people at the labs, including former coworkers and bosses, a few of whom are now quite senior. Both major American labs have had commercial discussions with me. Other non-lab companies in the AI industry have paid me substantial amounts of money for consulting and, separately, advertising spots on Complex Systems. You may reasonably model these and similar relationships recurring in the future. I believe that Stripe equity, which I own through having worked there, and which is the supermajority of my family’s assets, is materially exposed to the AI industry both mechanically and via investor sentiment.]
Zvi: I do buy individual stocks. I own Google and Amazon, relevant to Anthropic, but I deliberately did not invest directly in Anthropic because of potential conflict of interest concerns.
Patrick: And nothing that you hear on this podcast is investment advice. Okay. So let's start it out.
You recently wrote something of your own perspective on the S-1, which had some key takeaways. Do you want to walk people through those key takeaways?
How the S-1 talks about existential risk
Zvi: Yeah. So as usual, when I look at anything from Anthropic, I want to see their attitude towards existential risk, alignment, whether or not they're going to potentially kill everyone.
So in this case, they mention existential risk only in passing, only in the passive voice. They're clearly trying to have it both ways. When they talk to the investors, they want to say, "Oh, look at our big mission, but our big mission is to build this super profitable hypercomputing thing." And then other times they want to say, "Our geniuses in the data center actually might kill everyone," and these two things have to coexist.
Similarly, pacing the frontier is something they do talk about here, but then they make clear to investors, "Don't worry. When we said pacing the frontier, we did not mean not making incredibly fast AI progress. We did not mean voluntarily let someone else go first. We just meant it would be great if everybody could collectively agree to go only at super speed and not at ludicrous speed." But they will do the embedded evaluations.
Similarly, we're all worried about recursive self-improvement. And here they call that "closing the loop" to be more business-friendly, but they say that their entire business model is they want to close the loop. They are worried that if someone else closes the loop before they close the loop, they will be out of the loop and they will lose.
So they intend to close the loop as fast as possible and as much as possible.
Patrick: I feel like there is an interesting tension around S-1s, because we largely have this culture in the tech industry of, necessarily, Zuck speaks for Facebook and Facebook speaks for Zuck. Tech has done complicated innovations with share classes that enable the founder/company relationship to be relatively durable over a period of years and decades.
[ Patrick notes : Facebook was not the first company to issue super-voting founder shares but it popularized the model. Pattern matching goes both ways with Silicon Valley investors: you should believe your new investment is the second coming of Facebook. If you don’t, stop now; returns in venture are heavily weighted towards a handful of generational companies, and the entire game is spreading out your fund such that you are definitely in them and persuading the founder that you will be easy to work with (and so please don’t cut your allocation in any round). If you believe you are investing in the next Facebook, you affirmatively want the next Zuck at the helm durably regardless of how diluted their economic stake gets as they raise capital. Public market investors, seeing a company which grew from a dorm room to a global power, largely seem to accept precedent on provisions guaranteeing founder control. If founders have them at IPO, they keep them.]
Patrick continues : Founder-led companies are something of a thing, and Anthropic is doing its own thing with respect to complicated share classes, which we can get into in a minute, if people are very interested in the mechanics of single shares that have more than 50% of the voting power, yada, yada, yada. But when you get the quote-unquote "responsible adults" in the room — S-1s are largely drafted by external counsel and counsel working for the banks that are the underwriters of the S-1.
Responsible adults say: "We all understand that everyone in the tech industry thinks that the CEO runs the company. However, managerial capitalism says that the CEO only runs the company to the extent that they're not fired by the board on behalf of the shareholders.
And while you've taken some amount of effort to make sure that that never happens, we have to pretend that in principle it is possible that it happens, and so we can't privilege the CEO's voice among many other voices." And there's a difference between when the CEO is stating their own opinion in their own spaces and when they're speaking on behalf of the company, et cetera, et cetera, et cetera.
And I think in some parts, there is the usual level of cynicism that prevails in corporate communications, and in some parts authors sincerely believe, "No, there is a ritual here. We deeply buy into the ritual, and we care about the boundaries of it." But there has been much mirth around the use of passive voice in talking about the AI risks to humanity, because "concerns have been raised" is an understatement, as has been pointed out by yourself and Matt Levine and many others.
The “concerns” call was coming from inside the house, at the executive level and essentially all other levels of Anthropic. So it is an interesting inversion of the normal form, where the normal form is not claiming that the company could potentially kill everyone, and that would be bad for business results.
Zvi: Yeah, I mean, obviously it's a compromise between — the bankers would rather not mention this at all, because if everyone is killed, you will not in fact be sued for securities fraud. There will be no one left to sue you. And Dario and others at the company presumably wanted to use not only the passive voice but the active voice, and be much louder and more extensive about it, and use it as an opportunity.
Patrick: And there's also liability-minimization happening here, where lawyers will always advise you, "Don't say anything that you don't need to say. Anything that you don't need to say to get the transaction, deal, testimony, et cetera done just creates risk needlessly." And so if you feel emotionally or aesthetically or morally committed to saying, "No, we could kill everyone," the lawyers will say, reasonably, "Well, when you say that, you're providing causes of action to people in the future for any of a variety of things that could happen, including nothing much different than what is happening in the status quo.”
[ Patrick notes : I believe this factor is underrated. Consider a very prosaic lawsuit about an ordinary corporate matter. If the opposed side wants to demonstrate cavalier recklessness, which is frequently good legal strategy, one way to demonstrate recklessness is contrasting testimony that all normal steps were taken with “Really? Because at your firm, doing things that might end humanity is a normal Tuesday . Do you recall the following language from your S-1/senior executives/company culture guide/etc.”]
The lawyer will continue: “And that will be quoted against you, and it will be worse for being quoted against you from an S-1 versus from a blog post, because the various people that look at these things, like regulators in Washington, DC generally and potentially courts in the future, care about things in an S-1 much more than they care about things that are in a blog post.
And we will be able to wave away things that are in the blog post in the future as, 'Oh, that was just his opinion,' et cetera, et cetera. But we can't really wave away things in the S-1.”
Zvi: Right. And from my perspective, the whole idea is, everything in terms of the financial incentive — the lawyers, the corporation people, the lobbyists, the PR guy, the usual suspects, all the business interests — will in fact want to downplay and ignore and sweep aside, and make everybody else sweep away and ignore, all of these concerns.
And my view essentially is that if we do too much of that, there's a very good chance that in fact AI will kill everyone, either from Anthropic or otherwise. And the argument that, "Oh no, this is the place where we have to say it in a way that matters, therefore we shouldn't say it the way that you want to say it" — well, I say that's exactly my reason why you should say it there, and why, if you choose not to make a costly signal, you've told me who you are. You've told me you're not willing to make a sacrifice that's meaningful. You are signaling to me that, in fact, you will prioritize other considerations higher. You just did so.
That's the whole point of the exercise. And I understand entirely why people would choose to prioritize messaging to other people in these situations, but I never treat it as an excuse or as a reason to not care in the other directions. Should you choose these other considerations over the considerations that I care about — and maybe I even think you're right to do so—I'm going to knock you for having done it.
Founder control and Anthropic's share classes
Patrick: Cool. Shall we go to the second part of your takeaways, which was on control, I think?
Zvi: Anthropic has long had an attitude, like many tech companies, as you point out, that the founders should continue to control the company, and that the worst thing that could happen to Anthropic would be to have the likes of Google and Amazon suddenly having them maximize shareholder value and then thinking about only corporate things. And then their company would probably go out there and increase the risk that the world is destroyed, and lose their unique company culture, and this would be extremely bad.
So to that end, Anthropic has a very weird structure that they made even weirder in advance of the IPO. They have the one Class F share that belongs to the founders, and the founders collectively vote on how to exercise that share. And that share has 50.1% of the voting power for a wide range of issues, which is another way of saying the founders will keep control of the company as long as at least three of the founders continue to show up to the company, which could last quite a long time.
Anthropic's anticipation is this will last until long after the fate of the world has been decided one way or another. And this seems rather likely, because there are something like nine of them, and only three of them have to keep showing up.
Patrick adds post-interview: patio11 here with a brief correction of the record. So formally, Anthropic has seven founders, and there is an additional sort of early employee who gets a footnote, Benjamin Mann, but he is not formally one of the founders and doesn't get this inclusion into the Class F share class.
Also, by the way, Zvi says at one point that it's Class H that might side with the founders. The employees that donate equity to charity are getting Class E voting rights rather than Class H voting rights. Okay, back to the flow.
Zvi: And similarly, they have set up a Long-Term Benefit Trust, which will appoint nominally four of the seven board members over the long term, which in theory would've given them control of the company.
But if you look at the actual details, the board appoints three, the Long-Term Benefit Trust appoints three, and then there's the seventh seat, which is suggested by the Long-Term Benefit Trust, but has to be effectively approved by the founders. And if the founders don't agree, then it goes to the vote of the employees who donated stock to charity, also known as the Class E shares.
And a default assumption would be that the Class E shares would side with the founders.
Patrick: I don't think I've ever heard of another company explicitly privileging employees with share classes. Generally, it's something of the reverse.
[ Patrick notes : Employees most typically get stock options or restricted stock units which are designed to convert into common stock, or into a second class of common that is economically identical and differs only in voting, with the distinction typically disappearing after IPO or sale. Companies sometimes offer employees inducements to impair their stock in some way, such as accepting a voting proxy agreement (ceding their votes to the founders) in return for e.g. better-than-market exercise terms for their options.
Common shares vote like Republicans in Chicago: mathematically you have no say in outcomes, but you do have a right to have your opinion tallied.]
And it's interesting. It says you believe something strongly about your alignment, in the non-central sense of the word for AI, in that you have successfully recruited multiple cohorts of people who —
The traditional thing to do in the tech industry is to have the employees proxy their votes to the founders, and the founders literally get to vote them in whichever way they want. And you're, in doing this, suggesting, "No, I think the employees are sufficiently philosophically aligned with management that they will proxy without a proxy agreement being in place," which is an interesting point of view.
And I'm not saying "interesting" as a way of saying I don't think it is well-calibrated. In my many conversations with various people at Anthropic, they do seem to be quote-unquote "more aligned" than one would suggest for most tech companies at that stage, with that employee count, at that revenue growth rate, et cetera, et cetera.
[ Patrick notes : Many companies experience, after hypergrowth, discontent among long-time employees (and sometimes founders) that the company has lost something special in the culture. Sometimes this is diagnosed as “we got lame and the cool people left.” I think it is more similar to reversion to the mean: you had a core of N people, distinguished in some way. You then intentionally, as a mechanical consequence of hypergrowth and with your eyes open, hired 10 people with impeccable credentials from AppAmaGooBookSoft for every one who previously worked with you. You will always find your culture drawn to the median culture of AppAmaGooBookSoft as a result of this choice. You will be warned about it in advance, and you will say “It will not happen here!” It will happen to you. It happened to AppAmaGooBookSoft, too.]
Patrick continues : Not that there is another company at that revenue growth rate to point to, but we will get to that in a moment, I think.
Zvi: Well, so before we move on, I would say Anthropic has long cultivated a very special company culture that has a large awareness of safety, but also of altruistic goals and charity and making the world a better place.
The founders have famously pledged 80% of their shares to charity, and they've offered very, very generous matching donations for those who want to give their stock away. And in fact, how much stock you gave away determines how many Class E shares you have to vote. So they're, on several levels, determining, no, these are the preselected people who have very, very costly signaled that they want to influence the future in generally good ways, rather than build personal wealth and maximize profits.
Those are the people who will ultimat