TechnologyExplainer

A Guide to the Circular Deals Underpinning the AI Boom

A web of interlinked investments raises the risk of cascading losses if AI falls short of its potential.

By Cedric SamRachael DottleAgnee GhoshKyle Kim

TechnologyExplainer

Published: January 23, 2026 at 7:00 AM GMT+9

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ChatGPT kicked off the AI boom, but it was a landmark partnership between its developer OpenAI and software giant Microsoft Corp. that laid its financial foundations.

This playbook has been repeated by the AI community ever since. Cloud computing companies and chipmakers — Nvidia Corp. chief among them — have helped to fund leading AI developers, which in turn became some of their largest customers.

The result is an increasingly interconnected web of dependencies between technology manufacturers and AI startups. The risk with these “circular” deals is that they can create skewed incentives that may lead to bad decision making and magnify losses if demand for AI fails to match today’s lofty expectations. The stakes are high as the AI boom has sucked in gargantuan sums of money from debt and equity markets and buoyed multiple industries.

What makes a deal circular?

The term typically refers to an arrangement in which one company invests in another firm that buys its products and services: By doing so, the businesses effectively bind their fortunes more tightly to one another. (A circular deal is different from a fraudulent “round-trip” transaction, a term regulators have used for sham trades with no economic substance that are designed to inflate reported results.)

Circularity can be a winner for all involved if things go well: Company A buys a stake in Company B, giving Company B more money to invest and expand so that, in the end, it needs more of Company A’s products and services. When demand is rising and capital is readily available, the combination of investments and purchase commitments can act like a flywheel.

So what’s the problem?

If revenue from AI products does not grow as much or as fast as expected, company B might find itself staring at untenable bills for data center capacity and hardware. Company A loses twice — company B stops buying its products and its stake in company B tumbles in value.

Circular deals don’t just increase the potential damage to the companies in a market downturn. They can also skew the balance of incentives to encourage bad decision making. A company that has one of its suppliers as a major shareholder may be more likely to keep buying its stuff whether or not it makes commercial sense. That increases the risk of money being spent to secure business that fails to materialize. The circularity can be most risky when a handful of buyers are responsible for a large share of the market — as is the case with AI.

To supporters of the flurry of AI mega-investments, the “circularity” critique misses a basic point: Building AI is extraordinarily expensive, and the most advanced chips are still hard to get. In that kind of market, companies don’t just place orders. They lock in supply by pairing long-term buying commitments with financing. Asset manager Janus Henderson said the wave of AI deals is more like a “virtuous circle” that helps line up suppliers, builders and customers to meet the exploding demand for computing power.

The arrangements can also create leverage and more options for the AI labs. OpenAI, for example, has been trying to diversify its infrastructure beyond a single vendor (Microsoft). Now it has close tie-ups with many of the largest cloud computing providers and chipmakers.

AI industry leaders have defended the interconnected deals as the right approach to take given the unique challenge of financing a technological revolution.

“One player has capital and has an interest, because they’re selling the chips, and the other player is pretty confident they’ll have the revenue at the right time, but they don’t have $50 billion at hand,” Anthropic Chief Executive Officer Dario Amodei said at a New York Times Dealbook Summit on Dec. 7. “So I don’t think there’s anything inappropriate about that in principle.”

Here we go again?

During the internet boom of the late 1990s, fiber optic networks were built on the promise of relentless growth. Equipment makers helped to fuel the expansion with vendor financing — loans and other support that allowed telecommunication service providers to sustain the heavy investments.

When demand forecasts fell short and prices for transporting internet data sank, the model broke: Heavily leveraged carriers slashed spending and some filed for bankruptcy. Much of the capacity sat underused for years as the industry consolidated.

As the market softened, some carriers also relied on “capacity swaps,” selling one another rights to network capacity and recording the transactions as sales, even when the deals largely washed out because the parties were buying similar capacity from each other. In the early 2000s, US Congressional investigators examined this tactic at carriers including Qwest and Global Crossing. Both companies later moved to restate revenue tied to some swap deals.

Paul Kedrosky, a venture capitalist who covered networking and communications companies as a technology analyst during the telecom boom, said AI capital spending is climbing toward levels last seen at the peak of the late-1990s fiber-optic buildout. In some cases, he said, the risk is that facilities using today’s semiconductor chips will become obsolete before they’ve made a return on investment.

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