Marta Zava

Training a frontier artificial intelligence model costs hundreds of millions of dollars before a product exists, and few investors can write that cheque. This paper shows that the number who can falls as the fixed cost of a first training run rises, at a rate set by the concentration of the fund size distribution, so that doubling the cost removes about two thirds of the possible backers. The firms that compete are therefore selected by a small group of allocators before any customer has expressed a view. Three results follow. The price paid by the winner separates into a rational bid, a premium created by the fund’s deployment clock, and an error from failing to adjust for adverse selection, and the sign of the price response to competition identifies which one dominates. Concentration trades breadth for depth, improving the funded set only when the skill advantage of the few outweighs the information lost through having fewer independent views, a loss that is small when investors think alike. And large upfront cheques reduce the value of stopping, so ventures funded under deployment pressure should fail later and larger rather than more often. The effective policy margin is access to compute rather than regulation of the capital market.Training a frontier artificial intelligence model costs hundreds of millions of dollars before a product exists, and few investors can write that cheque. This paper shows that the number who can falls as the fixed cost of a first training run rises, at a rate set by the concentration of the fund size distribution, so that doubling the cost removes about two thirds of the possible backers. The firms that compete are therefore selected by a small group of allocators before any customer has expressed a view. Three results follow. The price paid by the winner separates into a rational bid, a premium created by the fund’s deployment clock, and an error from failing to adjust for adverse selection, and the sign of the price response to competition identifies which one dominates. Concentration trades breadth for depth, improving the funded set only when the skill advantage of the few outweighs the information lost through having fewer independent views, a loss that is small when investors think alike. And large upfront cheques reduce the value of stopping, so ventures funded under deployment pressure should fail later and larger rather than more often. The effective policy margin is access to compute rather than regulation of the capital market.

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