Tomasz Tunguz, general partner at Theory Ventures, says AI innovation isn't showing signs of slowing down, but state-level regulation like the one recently passed in New York could hurt startups.

Wall Street

Tomasz Tunguz of Theory VC highlights the significant role of debt-funded data center buildouts in driving US GDP growth and supporting the rapid expansion of AI startups. He notes concerns about the financial health of major infrastructure providers like Oracle, whose credit status has come under pressure due to high debt levels and negative cash flow.

Tunguz also addresses the regulatory landscape, emphasizing that complex or fragmented regulations could hinder startup growth and US competitiveness. Despite these challenges, he observes that AI innovation and company growth rates are accelerating, with advancements such as Google's Gemini 3 marking unprecedented leaps in model performance.

AI Innovation isn't slowing down, Theory's Tunguz says

Let's start with what you've been writing about the debt issuance the worries that we have about Oracle and the basically business is able to afford the infrastructure build out. One of the big drivers of US GDP growth in the last year has really been the data center build out about 1 percent 1.6 percent of US GDP probably 3 percent next year. It's funded a lot by debt about 60 to 70 percent of it. OK. Funded by debt. How does you as a VC backer someone who's found unicorns out there who keep striking gold. How does that matter to you if some of the biggest companies out there are financing the infrastructure with that. It matters a lot because the startups that we back rely on these data centers in order to run a eye. And if those data centers are ultimately healthy or unhealthy it dictates whether or not their GPUs the processors to execute the AI. For example we've been watching Oracle credit default swaps. You can see the spread on the CDS is growing to about 150 percent trading at or near junk levels. And that's because there's broader concerns about whether Oracle can repay that debt. If you look at the cash flow from operations is negative and they have eight years but an eight year time horizon to repay that debt before they went cash flow negative. And so as a result they're trading a junk. And that's that can be a concern if the ultimate demand for their data centers doesn't exist. What about the ultimate demand. You're the person who is helping finance the companies that want to use the data centers or at least build upon models that are using them. Well right now you see the major hyperscalers. They're still two years out on their GPUs. Neo clouds which are the smaller GPU data center companies are also growing incredibly quickly. The vast majority of A.I. today is text. As we heard just a little bit before we will see significant use of A.I. and use of video. And as we've seen with Netflix and others video takes about 100 to 1000 X the overall consumption. So right right now as of this moment there's no real concern around overall A.I. demand. We see plenty of it. But what we're watching is if there's any slip if there's a change in the dynamic between NVIDIA and Google GPUs if there's a change in the overall consumption of open source models because there's so much more efficient ultimately take GPU cycles away from some of these data centers. The massive expectations placed on these companies could could be crushing. What about the regulatory landscape. We were just talking about that with Miles Miller and A.I. oversight in New York SF on the West Coast in California. Does it matter to your startups. Absolutely it matters. One of the dynamics around regulation is the idea of regulatory capture where the largest companies actually benefit from regulation. They have bigger balance sheets. They can sustain the regulatory costs the lobbying costs in order to advocate for their for their long term goals whereas the smaller companies say a business that we back to the tune of 25 to 50 million may not have those resources. So we would like to see very simple regulations at an extremely high level with a single regulatory body. And that way startups can continue to thrive just the way they did in the early days of the Internet. Do you think the federal government will help pass that Congress. I hope so. David Sachs who's the eyes are has indicated that that is the intent that the federal government pass a overarching regulatory regime. And ideally that simplifies and eliminates all of the state regulation because if there is this panoply of different state regulation just as there is with money transmittal licenses or within banking the cost of doing business in each of these states increases and that reduces the pace of innovation and ultimately our competitiveness. U.S. competitiveness in the world. How is a innovation from your viewpoint right now. Too much. How are we seeing some of your companies perform. So the companies are growing at rates that we've never seen zero to 100 million in run rate in a year. That is now still rare but I was unthinkable maybe five years ago in the previous generation of software. So these companies are growing unbelievably quickly. Another data point that I'll share is that the pace of the models themselves their sophistication is only accelerating. So Gemini which is the Google model released Gemini 3 was the single largest step function in performance ever which is wild. Right. Because we think about innovation is on the step function of S curves and we think at some point it will plateau. But if any if the recent data is any indication the pace of innovation is only steepening.

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