What's Happening?
A new study from the Bank for International Settlements (BIS) reveals that a significant portion of funding for Artificial Intelligence (AI) firms comes from other AI companies. The BIS bulletin, titled 'Circular relationships among AI firms,' found that between
2021 and 2025, 55.2% of incoming investment into AI firms originated from other AI firms. This indicates a tightly looped financing web where AI suppliers often bankroll their own customers. The research, which examined 1,246 AI companies, also highlighted that 46.4% of the value of these intra-AI deals involved commercial supply-chain relationships between the investor and target firms, even though these deals represented only 16.1% by count. This suggests that while such arrangements are not frequent, they tend to be very large in value.
Why It's Important?
This circular funding structure, where AI firms invest in and supply each other, presents both benefits and risks. On one hand, it can reduce information asymmetries, as investors who are also suppliers likely have a deeper understanding of the target company's business. It can also help companies secure access to critical inputs, which is crucial in a sector facing hardware and computing capacity bottlenecks. However, the BIS flags significant macroeconomic risks, including increased opacity and potential for contagion during financial stress. If a supplier invests in a customer who then heavily spends with that supplier, it becomes difficult to differentiate organic market demand from demand effectively financed by the supplier itself. This can lead to an overestimation of the sector's true growth and create vulnerabilities if end-user demand falls short of expectations, potentially causing financial market volatility and asset price corrections.
What's Next?
The BIS bulletin suggests that for investors, the high concentration of funding within the AI sector implies a less diversified funding base than it might appear. This raises questions about revenue quality and the sustainability of growth driven by internal financing. For regulators, while circular relationships are not illegal, the report calls for clearer reporting on supplier investments, supply commitments, and cross-holdings. This increased transparency would enable markets to price these relationships more accurately and allow for better risk assessment. The report also places hyperscalers—large tech companies running cloud and computing operations—at the center of this picture, as they are simultaneously investing in AI companies and securing supply commitments. This indicates that future regulatory focus might be directed towards these large, interconnected entities to mitigate systemic risks.
Beyond the Headlines
The prevalence of circular funding in the AI industry highlights a broader trend of vertical integration and ecosystem control within the technology sector. This model can create powerful, self-reinforcing loops that accelerate growth but also concentrate power and risk. The ethical implications include potential anti-competitive practices, as smaller firms might struggle to compete against integrated giants that can leverage their investment arms to secure market share. Furthermore, the opacity of these arrangements, especially with private companies and complex deal terms, challenges traditional financial analysis and regulatory oversight. The long-term consequence could be a less dynamic and more fragile AI landscape, where innovation is dictated by a few dominant players, and systemic shocks could have far-reaching effects on the global economy.
