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LLM Inevitabilism

(tomrenner.com)
1616 points SwoopsFromAbove | 15 comments | 15 Jul 25 04:35 UTC | HN request time: 0.001s | source | bottom
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lsy ◴[15 Jul 25 05:33 UTC] No.44568114[source]▶
I think two things can be true simultaneously:

1. LLMs are a new technology and it's hard to put the genie back in the bottle with that. It's difficult to imagine a future where they don't continue to exist in some form, with all the timesaving benefits and social issues that come with them.

2. Almost three years in, companies investing in LLMs have not yet discovered a business model that justifies the massive expenditure of training and hosting them, the majority of consumer usage is at the free tier, the industry is seeing the first signs of pulling back investments, and model capabilities are plateauing at a level where most people agree that the output is trite and unpleasant to consume.

There are many technologies that have seemed inevitable and seen retreats under the lack of commensurate business return (the supersonic jetliner), and several that seemed poised to displace both old tech and labor but have settled into specific use cases (the microwave oven). Given the lack of a sufficiently profitable business model, it feels as likely as not that LLMs settle somewhere a little less remarkable, and hopefully less annoying, than today's almost universally disliked attempts to cram it everywhere.

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alonsonic ◴[15 Jul 25 13:05 UTC] No.44570711[source]▶
I'm confused with your second point. LLM companies are not making any money from current models? Openai generates 10b USD ARR and has 100M MAUs. Yes they are running at a loss right now but that's because they are racing to improve models. If they stopped today to focus on optimization of their current models to minimize operating cost and monetizing their massive user base you think they don't have a successful business model? People use this tools daily, this is inevitable.
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ehutch79 ◴[15 Jul 25 13:34 UTC] No.44571007{3}[source]▶
Revenue is _NOT_ Profit
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1. throwawayoldie ◴[15 Jul 25 13:50 UTC] No.44571163{4}[source]▶
And ARR is not revenue. It's "annualized recurring revenue": take one month's worth of revenue, multiply it by 12--and you get to pick which month makes the figures look most impressive.
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2. UK-Al05 ◴[15 Jul 25 14:03 UTC] No.44571287[source]▶
That's still not profit.
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3. jdiff ◴[15 Jul 25 14:05 UTC] No.44571311[source]▶
Astonishing that that concept survived getting laughed out of the room long enough to actually become established as a term and an acronym.
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4. airstrike ◴[15 Jul 25 14:09 UTC] No.44571351[source]▶
You don't get to pick the month. At least not with any half-serious audience.
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5. throwawayoldie ◴[15 Jul 25 14:21 UTC] No.44571443[source]▶
I know. It's a doubly-dubious figure.
6. throwawayoldie ◴[15 Jul 25 14:21 UTC] No.44571452[source]▶
We're not talking about a half-serious audience: we're talking about the collection of reposters of press releases we call "the media".
7. eddythompson80 ◴[15 Jul 25 14:34 UTC] No.44571567[source]▶
It’s a KPI just like any KPI and it’s gamed. A lot of random financial metrics are like that. They were invented or coined as a short hand for something.

Different investors use different ratios and numbers (ARR, P/E, EV/EBITDA, etc) as a quick initial smoke screen. They mean different things in different industries during different times of a business’ lifecycle. BUT they are supposed to help you get a starting point to reduce noise. Not as a the 1 metric you base your investing strategy on.

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8. singron ◴[15 Jul 25 14:52 UTC] No.44571756[source]▶
So the "multiply by 12" thing is a slight corruption of ARR, which should be based on recurring revenue (i.e. subscriptions). Subscriptions are harder to game by e.g. channel-stuffing and should be much more stable than non-recurring revenue.

To steelman the original concept, annual revenue isn't a great measure for a young fast-growing company since you are averaging all the months of the last year, many of which aren't indicative of the trajectory of the company. E.g. if a company only had revenue the last 3 months, annual revenue is a bad measure. So you use MRR to get a better notion of instantaneous revenue, but you need to annualize it to make it a useful comparison (e.g. to compute a P/E ratio), so you use ARR.

Private investors will of course demand more detailed numbers like churn and an exact breakdown of "recurring" revenue. The real issue is that these aren't public companies, and so they have no obligation to report anything to the public, and their PR team carefully selects a couple nice sounding numbers.

9. jdiff ◴[15 Jul 25 15:33 UTC] No.44572237{3}[source]▶
I understand the importance of having data, and that any measurement can be gamed, but this one seems so tailored for tailoring that I struggle to understand how it was ever a good metric.

Even being generous it seems like it'd be too noisy to even assist in informing a good decision. Don't the overwhelmingly vast majority of businesses see periodic ebbs and flows over the course of a year?

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10. SJC_Hacker ◴[15 Jul 25 15:49 UTC] No.44572405[source]▶
> At least not with any half-serious audience.

So I guess this rules out most SV venture capital

11. marcosdumay ◴[15 Jul 25 16:04 UTC] No.44572575[source]▶
Just wait until companies start calculating it on future revenue from people on the trial period of subscriptions... I mean, if we aren't there already.

Any number that there isn't a law telling companies how to calculate it will always be a joke.

12. hobofan ◴[15 Jul 25 16:12 UTC] No.44572679[source]▶
ARR traditionally is _annual_ recurring revenue. The notion that it may be interpreted as _annualized_ and extrapolatable from MRR is a very recent development, and I doubt that most people interpret it as that.
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13. throwawayoldie ◴[15 Jul 25 17:11 UTC] No.44573459[source]▶
What does it tell you then, that the interpretation of "A" as "annualized" is the interpretation Anthropic, to name one, has chosen?
14. eddythompson80 ◴[15 Jul 25 23:46 UTC] No.44577153{4}[source]▶
(sorry I kept writing and didn't realize how long it got and don't have the time to summarize it better)

Here is how it sort of happens sometimes:

- You are an analyst at some hedge fund.

- You study the agriculture industry overall and understand the general macro view of the market segment and its parameters etc.

- You pick few random agriculture company (e.g: WeGrowPotatos Corp.) that did really really solid returns between 2001 and 2007 and analyze their performance.

- You try to see how you could have predicted the company's performance in 2001 based on all the random bits of data you have. You are not looking for something that makes sense per se. Investing based on metrics that make intuitive sense is extremely hard if not impossible because everyone is doing that which makes the results very unpredictable.

- You figure out that for whatever reason, if you sum the total sales for a company, subtract reserved cash, and divide that by the global inflation rate minus the current interest rate in the US; this company has a value that's an anomaly among all the other agriculture companies.

- You call that bullshit The SAGI™ ratio (Sales Adjusted for Global Inflation ratio)

- You calculate the SAGI™ ratio for other agriculture companies in different points in time and determine its actual historical performance and parameters compared to WeGrowPotatoes in 2001.

- You then calculate that SAGI™ ratio for all companies today and study the ones that match your desired number then invest in them. You might even start applying SAGI™ analysis to non-agriculture companies.

- (If you're successful) In few years you will have built a reputation. Everyone wants to learn from you how you value a company. You share your method with the world. You still investigate the business to see how much it diverges from your "WeGrowPotatoes" model you developed the SAGI ratio based on.

- People look at your returns, look at your (1) step of calculating SAGI, and proclaim that the SAGI ratio paramount. Everyone is talking about nothing but SAGI ratio. Someone creates a SAGIHeads.com and /r/SAGInation and now Google lists it under every stock for some reason.

It's all about that (sales - cash / inflation - interest). A formula that makes no sense; but people are gonna start working it backwards by trying to understand what does "sales - cash" actually mean for a company?

Like that SAGI is bullshit I just made up, but EV is an actual metric and it's generally calculated as (equity + debt - cash). What do you think that tells you about a company? and why do people look at it? How does it make any sense for a company to sum its assets and debt? what is that? According to financial folks it tells you the actual market operation size of the company. The cash a company holds is not in the market so it doesn't count. the assets are obviously important to count, but debt for a company can be positive if it's on path to convert into asset on a reasonable timeline.

I don't know why investors in the tech space focus too much on ARR. It's possible that it was a useful metric with traditional internet startups model like Google, Facebook, Twitter, Instagram, Reddit, etc where the general wisdom was it's impossible to expect people to pay a lot for online services. So generating any sort of revenue almost always correlated with how many contracts do you get to signup with advertisers or enterprises and those are usually pretty stable and lucrative.

I highly recommend listening to Warren Buffets investing Q&As or lectures. He got me to view companies and the entire economy differently.

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15. jdiff ◴[16 Jul 25 00:25 UTC] No.44577403{5}[source]▶
No worries about the length, I appreciate you taking the time and appreciate the insight! That does help start to work ARR into a mental model that, while still not sane, is at least as understandably insane as everything else in the financial space.