How a Blue Wave midterm might reshape the AI industry

0:00Sean O'Kane: Midterm results are in, and the AI industry could be facing a new wave of resistance to its data center build-out, or its compute campuses, as OpenAI is planning to rebrand them. Also this week, Squarespace and Canva are trimming their teams amid slowing growth, and we're tracking some big deals, including Marvel's$115 billion, and that's billion with a B, acquisition of Lumentum. Stick around.

0:29Sean O'Kane: Hello and welcome back to Equity TechCrunch's flagship podcast about the business of startups. I'm Anthony Ha and I'm joined by TechCrunch's transportation editor, Kirsten Korosek, and Sean O 'Kane, our senior reporter, Special Projects. Kirsten, you are not where we normally see. What's going on?

0:47Anthony Ha: Yeah, I'm in Boston. We just had our last event of the year, the Founders Summit. Totally different kind of event than Disrupt. Very focused on early stage entrepreneurs, people who just even have ideas. We had a very cool pitch showcase. I interviewed the co-founder of Toast. Great one day event all about giving advice to future founders, which was cool. And in just a day, I'm going to be heading off to Web Summit. So I will not be here on the recording next week. So I'm sorry you're going to miss me. But I have another way bigger announcement, which is this is Sean O 'Kane's last show.

1:29Kirsten Korosec: I'm glad that someone's sad. We're all sad.

1:33Anthony Ha: We're all sad.

1:33Kirsten Korosec: No, I'm going to miss you guys. This is a big bummer. My last day at TechCrunch and my last recording. And it's been a lot of fun being able to sit back with you guys and think about the news in a way that I don't normally sometimes. I feel like I feel like we we get to process everything here. And so I'm going to miss that a lot.

1:55Anthony Ha: So basically what you're saying is you're going to miss your weekly therapy session to digest all the tech news. Is that what you're saying? OK, good.

2:03Kirsten Korosec: Exactly. It's a therapy session slash news digest in front of, you know, many people who whom whom are faceless to me. Yes. The best kind of therapy.

2:12Anthony Ha: Well, you are headed off to Wall Street Journal. So congrats. We can't wait to compete with you and see what you're going to be writing. but we should talk about the news this week and get that therapy session going.

2:24Kirsten Korosec: Nothing to process this week.

2:26Anthony Ha: Yeah, there was this thing called Election Day and wow, it is rippling through the tech industry. And I say that broadly because it is broad. And, you know, Sean, I want to kick it off to you since it's your last show, but also because I think you have a lot to say about, you know, really what we're seeing in just the day or two after election day as it affects the AI industry and specifically data centers.

2:54Kirsten Korosec: Yeah, I mean, I think this was a narrative that really started to take root on election eve. And then also in the days since there are a number of I mean, well, first off, let's talk about the fact that one of the biggest, you know, data center builders was also the largest donor to the Republican Party, Elon Musk, and, you know, seems to have gotten basically nothing out of donating half a billion dollars, maybe even more by the time we see the final count. And in fact, is now sitting there with all of his businesses in a state that has remarkably turned about as blue as it could possibly turn for the first time in a very long time.

3:38Kirsten Korosec: So that I think is like the biggest thing hanging above a lot of this discussion. But, you know, there were also a bunch of ballot measures up around the country for, you know, that would have paved the way for data centers to get built faster. Almost all of them got shot down or voted against. And and so there's just this question now of when you have new leadership, democratic leadership who has tended to say it wants to pump the brakes on. and we can talk about like sort of the spectrum of what that's going to mean, right? Like some people really don't want any of this. Some people just want a bit more caution and a bit more information before things get built.

4:18Kirsten Korosec: With them in power, you know, there is a consensus view that, at least in the tech world, that this is going to mean we have a lot of roadblocks ahead for data centers, especially in places like Texas where, you know, folks like the governor-elect Ineosa is, you know, has spoken pretty openly about this being a campaign promise and something that she wants to focus on. So, yeah, it's it's the thing that I think the tech world is maybe a little too focused on. I'm curious what you guys think about that, but is certainly focused on coming off of Tuesday.

4:53Sean O'Kane: I don't necessarily think that they're too focused on it, but I understand maybe why it would feel a little bit disproportionate because the amount, you know, the data center ballot measures. Certainly there were a number of them, but, you know, it wasn't something that was on the ballot everywhere. And in different races, the dynamics might have been a bit different, but there was this sort of undercurrent and sense that it was, it seems to be an issue that reaches across the country that is bipartisan in a lot of ways, but that the Democrats had seemed to have been more effective at harnessing, you know, that energy.

5:34Sean O'Kane: And of course, there's probably all kinds of reasons why the Democrats did so well on Tuesday, but it does seem like sort of anti-AI and especially anti-data center sentiment was a big part of it. And that seems like a pretty potent political force that is much as, you know, I suspect, yeah, like the next two years, potentially beyond that are going to be more difficult for tech companies in general and kind of hyperscalers, data center companies in particular. I also imagine that they have to be a little bit worried about, well, like, is this going to continue to be an issue, not just with the people who got elected this year, but potentially in 2028 and beyond?

6:13Anthony Ha: Yeah, absolutely. I don't think that the data center issue is what brought everyone to the polls and led to the quote unquote blue wave. However, I will say that data centers have been an increasingly grassroots issue that depending on localities, in part because how hyperscalers and companies have gone about getting these data centers, very secretive, oftentimes requiring NDAs of elected officials or appointed officials, not sharing information about the scale of a project in very environmentally sensitive areas, including in the Southwest, where there's very much a water scarcity issue. So I think that a lot of folks, Republican independents and Democrats all saw this as wrong.

6:59Anthony Ha: And so they were motivated by it. But I don't think it was a singular issue. But now here's the interesting thing. There was a lot of like waving of hands about how we can possibly operate under any other circumstances. And we're already seeing companies like OpenAI all of a sudden go, oh, actually, we can change our policies. They just released what they call a compute campus policy blueprint. And guess what? They're not going to require NDAs anymore. They're going to share their plans and supposedly operate in less secrecy. And so I think what this shows is that when you put up either a regulatory certainty in the marketplace or at least signals of going in that direction, then corporations will respond.

7:45Anthony Ha: If you don't do that, they will not necessarily do the thing that we hope that they will do. Right.

7:50Sean O'Kane: One thing I want to emphasize from what you were just talking about is that part of what that's doing beyond laying out these policy changes is also an attempt to rebrand data centers because they have become such a toxic phrase. And so they're not data centers anymore. They are compute campuses. And I'm curious, you know, whether either of you think that'll take. I will also mention that one of the other very small effects of the election that I think is going to vindicate a prediction I made on equity a couple of weeks ago is this whole like super intelligence term. I think that's going away because I don't think any executive is going to be particularly inclined to follow Donald Trump's executive orders like right now.

8:32Sean O'Kane: So I feel like my prediction is going to be vindicated very shortly on that front.

8:37Anthony Ha: I think you just got an endorsement from, you know, one of Sean's pups there. My dog.

8:44Kirsten Korosec: Yeah, I mean, like, no, listen, compute campuses are where the super intelligence is made. Anthony, don't you see how this all comes together? This is just the way it works now. Yeah, I mean, this is ridiculous. Like, come on. Like, it's not going to change anything. It's going to cause them more effort. For a company that likes to say that it's no longer focused on side quests, open AI still loves to go in different directions a lot. And this is just like the latest kind of thing where it's just like, why are you spending time on this at all? You know, it doesn't really seem like it's going to move the needle.

9:19Kirsten Korosec: They have other fish they need to fry. Like, it's just, I felt like such a waste of time to try and like make people think.

9:27Anthony Ha: I have a great idea for open AI because in the spirit of making threatening things seem cute, they should 100 % create like a compute campuses like avatar cutesy thing and then just present that, you know instead of, you know, a power energy sucking water sucking data center.

9:48Sean O'Kane: I'm sure that's going to happen anytime soon now. I mean, they could also like build more of their own offices and if these are just lovely compute campuses they should just build their own offices there or work next door, see how that works out for them. I think it's something else that I'm wondering about is to what extent the election is also maybe like just this actually kind of the second part of like a one-two punch of something that I think we alluded to last week, but kind of became a little bit clearer shortly after we recorded, which is also that there's just been this like reshaping of how or a big shift in how Wall Street is reacting to a lot of these hyperscalers and AI companies and this sense that they're not excited about the idea that, you know, they should be spending all this money building new data centers, spending all this money on compute.

10:36Sean O'Kane: And so in a sense, there's now a financial incentive not to build all these data centers. And so I'm very curious how that's going to play out, that there's regulates that probably it's going to be harder to build data centers. Wall Street is probably not going to reward you for building data centers. But at the same time, to get to the scale that they want to get to, they're probably going to need to build data centers somewhere. Yeah.

10:57Kirsten Korosec: Look up, you know. Look up in the night sky there. We've talked so much about, you know, setting aside the technical feasibility of data centers in space that the attractive qualities of it, especially for someone like Elon Musk, are that there is, you know, there's no NIMBYism in space. There are no, you know, not really kind of an environmental regulator that's going to chase you down if you've got, you know, something something coming off of venting off of your space data center. There are all these reasons why, you know, companies like SpaceX are looking at this idea or Google, which has launched its first sort of really small scale test and started it up Project Suncatcher.

11:46Kirsten Korosec: And, you know, the thing is, like my point earlier about data centers maybe taking up too much of the focus of of tech, the world of tech and tech executives is I think there is. listen even if data centers on the ground get shut down or slowed you know to an unworkable timeline and you know the focus shifts to orbital data centers sure whatever that there's a lot of lag in between now and when that actually means anything and in the meantime there's a lot coming i think for big tech in general i think we're gonna see a whole suite of hearings where these executives are going to have to sit in front of Congress, the democratically controlled Congress.

12:29Kirsten Korosec: They're going to have to answer for, you know, money that they paid to the Trump administration and to the inauguration committee. And they're going to have to answer for what Doge did, you know, which never really has gotten a very good, like, full clinical accounting of all the different things that all the different Doge people did. And so, like, there's just so much that's going to happen between now and I think when when we will actually see the data center stuff. And I think there's there's the last point I'll make is like there's evidence in the market of this, too, because CoreWeave and some other companies have been trending downward since Tuesday and their, you know, their debt is not looking as great.

13:10Kirsten Korosec: But also there's, you know, Anthropic just landed like one of the best or biggest debt packages ever. SpaceX just loaded it up on like$40 billion more debt. So there's hedging going on in the market for sure when it comes to the more AI and data center focused people and our companies. And, you know, from there, I think there's just going to be a lot more for these tech executives to worry about in the near term.

13:30Anthony Ha: Yeah. I mean, speaking of the near term and just yesterday met us head of platforms, Dina Powell McCormick. She was at the Wall Street Journal tech conference and was saying a lot of the points that Anthony was mentioning about it's going to be harder to get data centers. And she said something that I thought was really interesting. And she said, I can tell you that every hyperscaler is now thinking about, do we need to build outside of the United States? Which I thought was pretty spicy comment, really, because when you think about it, a lot of this push for compute campuses, AI data centers, whatever you want to call them, is wrapped around the idea of the United States winning the race in AI and how important it is for us to have infrastructure here in the United States.

14:13Anthony Ha: So, you know, back to that transition about talking about space, is that what she's referring to? Or is she referring to literally putting these in Canada or in other areas? This really reminds me of another life of mine when I covered the energy industry, specifically oil and gas. And what I learned during those times is there was a lot of lobbying and gnashing of teeth about this idea of being regulated. But once the industry was regulated, what they really wanted was certainty in the marketplace. And then they responded and they adhered to that for the most part. And I say for most part in like quotes.

14:48Anthony Ha: Regulatory certainty actually matters in the marketplace. And so I think that that is what has been missing. It's been a bit of a free for all and putting local standards and forcing these companies to adhere to those. As long as they don't continue to change and swing a different way within a year or two, I think that they can adjust just fine. And I don't think they need to go outside the United States or in space. That's my prediction. But that's my rant. We'll see how it turns out. And you can call me on it next year if I'm completely wrong. But there's other things that are happening within the industry.

15:25Anthony Ha: And that is, seems to be like some workforce corrections happening. And I want to kick it off by mentioning that Canva is laying off over 1 ,200 people amid slowing growth. And I'm wondering, is this just the results of what we've been seeing building up to this moment for the last year or something else going on?

15:44Sean O'Kane: I was wondering about that myself in that, you know, on some level, it feels very just like of a piece of the fact that like every tech company has been laying off, you know, some significant portion of its workforce in the last few years, you know, usually sort of connecting that in some way to AI. And, you know, then there's also sort of debates about sort of like AI washing. And is this actually also they just had to sort of correct for maybe overhiring during the pandemic. But it also seems like Canva and another company that had layoffs recently, Squarespace, and both of them laid off about 20 percent of their workforce.

16:21Sean O'Kane: they do seem connected also in this sort of broader sense of these are tools that made in one case sort of creating like you know images graphics art and in the other case websites simpler and so of course when you are kind of the the next step in that kind of you know democratization that simplification what you know whatever you want to call it there's always the risk that somebody can kind of come up from below and make it even simpler and more accessible and And so it makes sense to me that as much as I don't necessarily think the AI versions, the vibe coded versions of, say, a personal website are necessarily better, that that would be a very major threat to both of these companies.

17:01Kirsten Korosec: I know in Canva's case, the cuts were kind of across the board. And so I think to your point about like a lot of the larger tech layoffs, I think we are still seeing some of like some tail end of what happened sort of mid and post pandemic where like all these companies went on hiring sprees. coming out of the Zerp era, people just started to get a little bit more sober about what they actually needed. I think one thing that's interesting to think about too is for a minute there, it really looked like a lot of other companies were quote unquote following Musk's playbook at Twitter as he turned it into X and cut to the bone.

17:43Kirsten Korosec: And it was tempting to think that, oh, he's setting an example that a lot of these other companies and executives are going to follow of cutting so hard and really just laying off tons and tons of people. And I think there was probably a couple situations where that was true. But I think more broadly, it's this other theme that we've seen of maybe they just overhired to begin with. And, you know, there was always going to be a correction coming. Like it was surprising to me that Canva had this many people to cut to begin with. Right. Like that's a lot of employees.

18:16Anthony Ha: Yeah, I like your point about the sort of sobering moment. It doesn't have to be doomy to just not be like full hype, completely, you know, blowing through budgets. Everyone use all the tokens all the time. Everyone build, build, build. And I do think that that we're going to see an adjustment. This is a pretty big adjustment for these two companies, to be sure. And I think it's notable that they both have launched their own AI products. But even here in Boston, when I was at the Founders Summit, I was talking to folks who are like founders and people running businesses who are using AI tools.

18:52Anthony Ha: And they all kind of were saying the same thing, which is they're excited about it. But now they're sort of level setting. There isn't this big push for everyone to use tokens all the time. And it's more about the smarter use of AI tools and what really works. And there was this very experimental, very quick phase in which we just saw this extreme buildup. And I think now a lot of companies, Canva and others, are kind of taking stock and seeing what can we really accomplish and do we really need all these people to accomplish that? What I'm curious to see is if other companies follow through the end of the year.

19:29Anthony Ha: this is a period of time, particularly either right now or usually right after the holidays, when we see big cuts happen and those adjustments to that 2027 budget. That is, to me, what we watch for in the future and to really get a sense of whether these are just a couple of one-offs or a larger trend.

19:48Sean O'Kane: One other thing to mention as far as Canva goes is, and this is not to contradict anything that Sean said, because I do believe that probably there's some, you know, just broader, you know, correction in terms of hiring that these companies are making is also that Canva did say that its revenue growth slowed this year. And then it's kind of the first time that that's happened. You know, I don't know to what extent that is specifically driven by AI. And we should say both of these companies have, you know, AI products as well. But you can imagine that in theory, you know, you could use a more general purpose chat bot instead of, or just AI tool instead of kind of something that's purpose-built for either websites or art.

20:29Sean O'Kane: So I don't know for sure how much of that we should say is specifically due to the rise of these competing tools, but I wouldn't be surprised if that played a significant role.

20:37Kirsten Korosec: You can contradict me. I'm on my way out. I think there is an element of it. I don't want to downplay the fact that like the more popular AI tools made by OpenAI or Anthropic and others are competing Here in some way, I think that that's clearly happening and I think that's clearly going to be a pressure on companies like this moving forward There are two things that I want to say kind of about that though one is that there There is I think an element and I think this will be a really interesting thing I'm eager to watch you guys cover this as as it continues to go in this direction There's gonna be an element of like okay if Claude can do xyz what do I need you know Squarespace for I think the answer to that question is going to be like there are people who work at Squarespace there are like things that they're offering you know they're packaging a product for you and with Claude or with with ChatGPT like you're always sort of operating on this like yes you can you can make custom stuff for yourself and it's all great and it's like getting more capable but there's no like person to go to with concerns or questions or guidance or you know and like you can get some of that from the chat bot you can't get all of it from it and so like these companies are just going to have to figure out how to make themselves you know how to make a product that covers all those bases and how to make a service which is really kind of also what they're doing that is there for you when you have questions or you need need things for you know what it is that you're building and you know on that point like one of the things that the sort of uh the canvas ceo said in her note that went out to all the employees is that they're going to try to reduce quote sub specialization which means uh the employees might be asked to be doing more with less uh probably leaning on AI tools like the ones made by Anthropic and OpenAI.

22:34Kirsten Korosec: And we're seeing that kind of across enterprise businesses everywhere and across the corporate world. And there is certainly an element of, you know, there of how much can you push that? It's certainly there. I can totally see where there's a value in using those tools to be able to do more than you were able to do before, especially in coding. But now that we're talking in more like softer skills, uh you know in the corporate world but there's going to be burnout from that there's going to be limits to that when it comes to the humans who are using the tools and so like what kind of balance are they able to strike how much are they going to be able to sort of like put on the shoulders of these employees before they break is a really interesting question uh for the next few

23:21Anthony Ha: years and it's an interesting point in terms of like what what it means for companies like Squarespace, and you can see a future in which some companies will double down on human-facing customer contact in order to stand out unlike others. And I'll be very interested to see how that plays out. But I really want to talk about an incredible tech deal that the number raised both of my eyebrows. And I'm talking about the custom chip designer, Marvel. They signed a deal to acquire Lumentum and an all stock deal. And it is, drumroll please,$115 billion. That's a lot of money. Thoughts?

24:03Sean O'Kane: I mean, I have the same thought, which is just that, yeah, that is a lot of money. And I guess, I mean, to me, my reaction to it maybe speaks to this kind of transitional moment that we seem to be in right now, where like, I don't know, maybe a year ago, this would have seemed like kind of normal. Just like there's so many giant rounds being raised, like major M &A. I mean, I think maybe at any time this would have seemed like a very large deal, but it feels like things have also kind of gotten quieter, particularly for deals of this scale. That, I mean, obviously there's some degree of consolidation as people are kind of figuring things out and realizing that maybe, you know, not all these AI companies are going to be successful, but to see Marvel spending this much money, albeit not in cash form, but still like that is a major, major commitment.

24:51Sean O'Kane: and just impressive just for the size of the number.

24:54Anthony Ha: Yeah, I want to put it into perspective here. So this is one of the biggest acquisitions in tech history, even though it is an all-stock deal. We'll count it as such. No asterisks. Microsoft bought Activision Blizzard for$68.7 billion just four years ago in 2022. Dell bought EMC for$67 billion in 2016. That was a pretty big number back in 2016, by the way. That's like quite a long time ago. but it gives you a sense of the scale of what this size deal is.

25:24Kirsten Korosec: Yeah, I mean, I think that one of the most interesting things to me about this deal is it's like it seems pretty emblematic of something that a conversation that I kept having at Disrupt last month, in particular with Carl Alomar from M13, who was sort of lamenting both onstage and backstage about how the inflated valuations of basically any company working in AI, whether that's on the software side or here on the hardware side, is just absolutely tilting the playing field when it comes to startup investing and acquisitions and the tension between those two things. And his position as an investor was basically like they're losing a bunch of opportunities to stick with companies that they think should continue to go through sort of the early to mid to late stage funding process because there's just so much of this kind of like funny money stock that companies like Marvel can throw around to just say hey we don't you know we see value in just acquiring this company and we have the ability to do it now on paper so let's just do it and so there are all these kinds of distortions happening in the broader space that I feel like we're going to have probably some kind of reckoning with over the next few years.

26:44Kirsten Korosec: And I don't know what that's going to look like. But I do not think we're done seeing this, this kind of stuff happen.

26:51Sean O'Kane: Yeah. So this isn't the only acquisition that we wanted to talk about this week. We're about to talk about some other deals that I think on a normal week would seem like pretty sizable deals, but they are kind of dwarfed by the Marvel deal. But CrowdStrike paid$400 million for a cybersecurity company called Fiddler AI, And then$95 million for another company called Dreadnode. It seemed like these deals kind of got packaged together in an announcement of CrowdStrike kind of making a big investment to kind of expand on the AI security side of things, which seems very well-timed.

27:23Anthony Ha: Yeah, cybersecurity is so hot right now. I wonder why.

27:26Kirsten Korosec: Yeah, I mean, this is like one of those things where I wonder what the backroom process was like. Like, is this the kind of thing where it was these conversations were happening and then the last, you know, and then, you know, quote unquote Black October happened and they accelerated or I would love to know more about what kind of pressure CrowdStrike felt it was under to go after acquisitions like this. And with so much up in the air about cybersecurity in general, I think we're going to see a lot of a lot more stuff like this where it's like a hardening around the biggest names in the sector because trust is such a big deal when it comes to, you know, cybersecurity in general, which sounds like a dumb statement, but like it knowing knowing the companies like CrowdStrike and knowing the players having a reputation like all that stuff is just going to have so much more of a premium as we move into more uncertain worlds.

28:20Sean O'Kane: This actually gives me a chance to correct something I said when we did our discussion about the PHP vulnerability a few weeks ago, which I did when I did my post about it, I already posted the correction. But I'll just mention because I think that when people have talked about that vulnerability, they've talked about it as something that was discovered by AI, which, as our colleague Zach Whitaker pointed out, like, that's not true. It was discovered by human researchers and they were participating in an open AI program. They used AI tools to actually explore some of the ways that this vulnerability could be exploited.

28:52Sean O'Kane: But it wasn't that giant vulnerability was not a case of AI is just going out and finding that thing. It sounds like that is a future that we are moving into. But I think all those forces that the two of you are talking about, I think, are still in place, though, that there's going to be a lot of pressure on cybersecurity companies to have like technology. and plans for how they might deal with similar situations in the future. And it does seem like a market where, yeah, the incumbents are going to have a big advantage because trust and the desire to kind of have a single, you know, provider rather than like 10 different point solutions seems like it's going to be pretty compelling.

29:29Anthony Ha: Totally. And thank you for making that correction. We forgive you.

29:34Sean O'Kane: Thank you.

29:35Anthony Ha: But it'll be interesting to see what happens.

29:36Sean O'Kane: Oh, also, if anyone wants more detail about what actually happened, we had the CTO of Wiz on equity last week. So go check that out.

29:44Anthony Ha: Yeah. You know what is another big trend is microdramas. And that leads us to our last deal. And I actually had no idea the numbers were this big. So it's another one of those where I was like, oh, wow. OK, I need to adjust my thinking here. Apparently more than 118 million users watch microdramas every month as a serialized format. But Elo Elo Story TV just raised$80 million in a Series C from Hornvale Capital and NBC Universal. And who knew that so much money could be made on microdramas?

30:20Sean O'Kane: I'm mostly just excited because, you know, one of my millions of different roles I had at TechCrunch was as a media and entertainment reporter. And it just felt like for so long, you know, every VC and, you know, NBC Universal is in a VC, but the idea of investing in a media startup was so laughable that obviously who would do this? There's so many more lucrative and promising areas to invest in. And so it's exciting to see that media companies can raise money again, albeit from other media companies rather than from VCs.

30:50Kirsten Korosec: Quibi redeemed. Jeffrey Katzenberg wasn't wrong. He was just too early. So true. Well, you know what? That feels like as good a place as ever to end my final episode of the equity podcast. We it's been a pleasure doing this with you guys. But, you know, the the show will go on and equity pod will be back next week. Follow along at equity pod on X and threads. And it's been a real one. Thanks, y 'all.

31:19Anthony Ha: Thank you.

31:19Kirsten Korosec: Bye, Sean. We're going to miss you.

31:23Anthony Ha: Equity is hosted by TechCrunch Senior Reporters and produced by Teresa Locansolo with editing by Cal. Subscribe on YouTube or wherever you get your podcasts and find out what's next at techcrunch.com slash events. Thanks so much for listening and we'll talk to you next time.