“… Broadly speaking, circular financing often goes something like this: One company pays money to another as part of a transaction, and then the other company turns around and buys the first company’s products or services. Without the initial transaction, the other company might not be able to make the purchase. The funding mechanism could take the form of an investment, a loan, a lease or something else.
During the late 1990s and early 2000s, such dependency loops mainly consisted of telecom-equipment makers
lending money or extending credit to customers so the customers could afford to buy their gear. In those days, this was widely referred to as vendor financing. …
Vendor financing still exists. But it isn’t how the bulk of the latest attention-grabbing, circular deals are structured.
Take, for example, the strategic partnership announced in September by Nvidia and OpenAI, the company behind ChatGPT. The companies said Nvidia would
invest as much as $100 billion in OpenAI, and that OpenAI is looking to buy millions of Nvidia’s specialized chips. That isn’t vendor financing, because it doesn’t involve a loan to finance a specific purchase. But it does look circular.
OpenAI isn’t publicly traded, so it doesn’t disclose financial reports. But it is known to be losing money, notwithstanding a recent secondary share sale that implied
a $500 billion valuation. Nvidia’s investment will help OpenAI pay for its infrastructure build-out. Nvidia also stands to get money back from OpenAI through chip sales, boosting its revenue.…”