Talked to Michael from Coreweave about debt six months ago: 18:18–23:43: Jason asks about CoreWeave’s debt; Michael answers (cleaned of filler words and stutters, otherwise as spoken) JASON: How does all that debt work? That is something you guys specialize in. Corporate debt… I’m in the venture business, people are like, “Why should I be in venture when corporate debt pays so well?” Corporate paper’s so huge. I’m curious how this fits in, and what interest rate people are paying on, you know, a billion dollars in infrastructure. What do they pay on that? MICHAEL: So CoreWeave has really been the innovator around a lot of the financing engines that have come to bear on this. We did the first GPU-based loans. I’m going to try to explain this in a way people can understand. What we do is we go out and we find a client. Let’s use Microsoft; you brought them up before. Microsoft comes to us and says, “We’d like to buy some compute from you.” And we say, “Okay, great. We’re going to sign a contract.” Once I have a contract in hand, I create something. It’s not a particularly creative name. It’s called the box. JASON: Yeah. MICHAEL: And what I do with the box is I take my contract with Microsoft and I put it in the box. I go to Jensen and buy the GPUs, I put them in the box. I take my data center contract, I put it in the box. And now the box governs cash flow. It has a waterfall of cash flow that comes into it and goes out of it. So the way it works is I build the compute, I deliver the compute to Microsoft, and they pay the box. They don’t pay me. It goes into the box, and the first thing it does is pay the data center. It pays the power bill. It pays the interest and the principal. And then whatever’s left flows back to us. So it is an incredibly well-structured, time-tested, pressure-tested vehicle to be able to borrow money against client paper and all of the other collateral around the deal. That’s why CoreWeave, a company many people had never heard of, was able to go out and raise $35 billion in 18 months to build infrastructure at scale. But what’s important to understand is the economics in this box are such that within 2.5 years of a 5-year deal, we have paid for everything. JASON: The principal’s been paid off. MICHAEL: The principal’s been paid off, the interest has been paid off. The return into the box is such that we’re able to generate returns to our company at the box level, which gives the most sophisticated lenders in the world, whether banks or private equity funds or whoever, confidence that they’re going to achieve the one rule of lending, which is “give me my money back.” JASON: Yes. Works better when that happens. So they look at this box and they’re like, “Wow, we’re really confident we’re going to get our money back.” And maybe they want 10 boxes. MICHAEL: That’s correct. JASON: And if any one box goes upside down, you can deal with it and it’s not as acute. MICHAEL: That’s correct. And they don’t cross-pollinate. They don’t cause contagion across the boxes. They’re all independent and discrete. That’s one. Number two: as you do this and show the lenders how this financing mechanism works, they continue to lend you money at progressively lower rates. When you think about our cost of capital over the last two years, we have dropped it by 600 basis points. JASON: Wow. MICHAEL: It is enormous. So you’re seeing a company driving its cost of capital down toward where the hyperscalers borrow, which will let us be competitive with them over time. And we have been extremely militant and diligent about feeding, watering and caring for those boxes, so we continue to have access to the capital markets in a way that lets us build and drive our business. JASON: That means you have to say no to maybe some people who want to be in the box. MICHAEL: Yeah. We look at some deals where they want to buy GPUs for a year, and I say that’s not a deal I can do, because it’s too short for me to amortize the expenses. So I won’t do that. JASON: And they can go to another provider who maybe wants to take that risk on, who has extra capacity. MICHAEL: Absolutely. But our business is really built around the risk management of getting to scale. In my mind, during this period of disequilibrium, when there aren’t enough GPUs in the world to provide compute for all the different use cases in AI, what matters for my company is to get enormously large. That drives down our cost of capital, and it means information flows in from all different parts of the market: large language models, high-speed trading, search, all of these things. They feed information back to us that tells us the next product we need to build, where they need help scaling, or what type of compute they need. All of that information flow is incredibly valuable to us. (Jason moves on to demand at 23:43.) CRWV https://youtu.be/-JBhTBu9ZbA?t=1083