Imagine you own a shopping mall. A new pizza restaurant wants to open, but it does not have enough money. You invest $500,000 in the restaurant. The pizza shop then uses much of that money to pay rent to you, advertise inside your mall, and buy services from other businesses you own.
Everything is real. The restaurant has a real kitchen. The mall collects real rent. Pizzas are being made, hopefully with anchovies available only upon request.
On paper, both businesses look stronger. The restaurant can say, “A major investor believes in us.” The mall owner can say, “Our rental income is growing.” But one question matters more than all the excitement: Are actual customers buying the pizza?
If people walk in and pay for lunch, fresh money enters the system and the investment may create a successful business. If few people buy pizza, most of the money is simply moving between the mall owner and the restaurant. That can continue for a while, but not forever.
The AI Version of the Pizza Shop
This is a simple picture of circular funding. In the artificial intelligence world, a large technology company may invest billions in an AI developer. The AI developer then uses some of that money to buy cloud computing, computer chips, or data-center services from the same company or its close partners.
| Technology company invests in AI developer → AI developer buys computing power → technology company reports more revenue → both may receive higher valuations. |
That does not mean the business is fake. The AI company receives real computing power, and the supplier provides real equipment or services. The concern is whether the demand would be as large if the supplier were not helping finance the customer.
A Real Example, Without Naming Names
Compliance departments have gently reminded us that naming actual companies in examples can be frowned upon, so we’ll keep this example intentionally anonymous.
Recent AI partnerships give us a helpful real-world picture: in one arrangement, a very large technology platform invested heavily in a leading AI developer while also serving as a major provider of cloud computing services. The AI developer received capital and computing capacity, while the technology platform benefited from deeper access to AI tools, future revenue opportunities, and more demand for its cloud infrastructure.
In plain English, the investor was not merely cheering from the bleachers. It was also selling the stadium lights, renting out the field, and sharing in some of the ticket revenue.
Another example involves a major chipmaker supporting certain AI cloud providers through financing or revenue-sharing structures tied to future infrastructure purchases. In pizza terms, the chipmaker is not only selling the ovens. It may help the restaurant afford the ovens and then receive part of the revenue from the pizzas baked in them.
Why Circular Funding Can Be Helpful
- It helps expensive technology get built. Advanced AI needs giant data centers, specialized chips, electricity, cooling systems, and cloud services before revenue fully catches up.
- It can move useful ideas forward faster. With enough funding and computing power, developers can bring promising products to market sooner.
- It spreads the risk. AI developers, cloud companies, chipmakers, and other partners can share the cost of building a new industry.
Why I Am Cautious About the Valuations
Circular funding can also make growth look more independent than it really is. An investment can raise the estimated value of an AI company. That company then spends money on cloud services and chips, increasing revenue for its suppliers. Investors may see that revenue and decide the entire AI market deserves an even higher price.
The activity is real, but the same pool of money can support several positive stories as it moves through the system. There is also a difference between real revenue and lasting revenue. A pizza shop can pay real rent with the mall owner’s investment. That does not prove the restaurant has built a lasting business.
That is where my reservation lies. Today’s AI valuations appear to assume that businesses and individuals will find AI useful enough to keep paying for it. Real customers must buy AI tools because those tools save time, lower costs, or help them do something better. That is authentic demand, and it is what eventually has to support the whole system.
If customers show up in large numbers, circular funding may have helped build an important new industry. If they do not, some AI companies could have a long way to fall. Companies priced for years of rapid growth are especially vulnerable when that growth fails to appear.
As investors, we should not mistake activity for value. A busy-looking food court is not the same as a profitable food court. At some point, someone outside the ownership group needs to walk to the counter, open a wallet, and buy a slice.
| The key question is not simply whether more AI infrastructure will be built. It is whether enough real customers will show up to pay for it. |
References
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- Microsoft, “The Next Phase of the Microsoft-OpenAI Partnership,” April 27, 2026. https://blogs.microsoft.com/blog/2026/04/27/the-next-phase-of-the-microsoft-openai-partnership/
- OpenAI, “The Next Phase of the Microsoft OpenAI Partnership,” April 27, 2026. https://openai.com/index/next-phase-of-microsoft-partnership/
- NVIDIA, “NVIDIA Unlocks AI Compute at Scale, Inviting Partners to Power the AI Infrastructure Buildout,” July 1, 2026. https://blogs.nvidia.com/blog/nvidia-unlocks-ai-compute-at-scale-capital-partners-to-power-ai-infrastructure-buildout/
These are the opinions of Legacy Wealth Management, LLC and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Dan Funderburk is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice. Copyright ©2026 Dan Funderburk. All Rights reserved. Commercial copying, duplication or reproduction is prohibited.
