Zero or Hero: A Technical Framework for Valuing AI Companies (Part I: Foundation Models) - Leonis Capital

SoftBank thinks OpenAI is worth $300 billion. Microsoft's investment implied a $157 billion valuation. Elon Musk wants to acquire it for $97 billion. They can't all be right—or perhaps they're all wrong. This valuation disparity isn't just about OpenAI. It reveals a fundamental problem in AI: We don't have a systematic framework for valuing AI companies. VCs complain about sky-high valuations but offer no alternative way to value this new type of company. Traditional metrics like ARR multiples don't capture AI's unique dynamics—the exponential pace of model improvements that can create what we call a "zero value threshold," where yesterday's cutting-edge technology becomes worthless as new capabilities emerge. Cloud computing analogies fall apart because AI isn't sticky—switching costs between API providers are minimal. Both foundation model providers and application startups face the harsh reality of tough competition and fleeting moats. To gain clarity in times of chaos, we came up w

SoftBank thinks OpenAI is worth $300 billion. Microsoft's investment implied a $157 billion valuation. Elon Musk wants to acquire it for $97 billion. They can't all be right—or perhaps they're all wrong. This valuation disparity isn't just about OpenAI. It reveals a fundamental problem in AI: We don't have a systematic framework for valuing AI companies. VCs complain about sky-high valuations but offer no alternative way to value this new type of company. Traditional metrics like ARR multiples don't capture AI's unique dynamics—the exponential pace of model improvements that can create what we