Shaky economics of GPU reselling startups

The business models of GPU reselling startups have some underlying issues. These startups rent GPUs from providers and resell access at a markup to AI developers. But they compete fiercely for limited GPU supply and sell at slight premiums to cover costs, capping margins around 50%.

Analysis from Stephanie Palazzolo of The Information.

What's going on here?

GPU resellers are seeing rapid growth but have slim margins and other challenges that make their sky-high valuations questionable.

What does this mean?

Despite this, some like Together are being valued by VCs at 15x revenue, more typical of high-margin software companies. This lofty valuation assumes Together's value will continue rising 10x to reach $1B at the least.

Investors seem to be applying software-like multiples based on revenue growth, ignoring the fundamental challenges of GPU supply, low margins and potential saturation. But public markets may apply a lower multiple based on its thin margins, making that growth difficult.

Why should I care?

This disconnect between valuation and core business reality is problematic. It pressures startups to pursue unsustainable growth and raises the spectre of painful future downrounds. More reasonable valuations tied to actual margin potential rather than hype are needed.

Understanding the realities these startups face is important to assess their true potential. Their services fill a clear market need today, but margins, growth trajectories, and end markets matter. Beyond investors, founders and developers should be eyes-wide-open about the challenges these resellers face when looking for GPU vendors.