Mercor aims for a $20 billion valuation and acquires Deeptune.

      A three-year-old startup operated by a 23-year-old is in discussions to increase its valuation to $20bn. The figures are impressive. However, one should examine the details closely.

      Mercor, an AI training marketplace, has informed investors that it can raise funds at a $20bn valuation, stating it has secured at least one term sheet at that figure, according to Bloomberg. These discussions are preliminary, and a deal may not finalize.

      The speed of this valuation is noteworthy. Mercor last raised funds in October at a $10bn valuation, and now investors are being asked to consider double that amount just nine months later.

      The company connects domain experts—such as engineers, doctors, and lawyers—with AI labs that require human input for training advanced models. Among its clients are OpenAI, Anthropic, and Google. The founders are three ex-high school debate teammates who left college to pursue this venture.

      At the age of 22, they became the world's youngest self-made billionaires.

      The contentious acquisition

      On the same day, Mercor announced its acquisition of Deeptune, a startup that creates simulated software for AI agents to practice real work prior to deployment—similar to a flight simulator, but for agents learning tools like spreadsheets or Salesforce. Mercor has confirmed the acquisition on its blog, though specific deal terms were not disclosed.

      There is a noteworthy detail: Andreessen Horowitz was the lead investor in Deeptune’s $43m funding round earlier in March, and one of the angel investors in that round was Mercor’s CEO, Brendan Foody, who later facilitated the purchase just three months afterward.

      Foody openly acknowledged the sequence of events, stating in an interview with Fortune that the angel investment was made with an acquisition in mind, indicating it was a significant motivation.

      Public disclosures have not clarified whether Mercor’s board or external investors had reviewed Foody’s personal stake prior to the deal's completion, raising questions about how a $20bn valuation warrants scrutiny from the board.

      The revenue figure needs clarification

      Foody claims that Mercor’s annual revenue run rate has surpassed $2bn, having doubled in just four months. While this headline figure is substantial, the details are more crucial.

      The $2bn represents gross billings rather than Mercor’s actual retained earnings. Contractors typically receive 60 to 70 percent of all billed amounts, as initially reported by The Information. After factoring in the experts' compensation, Mercor’s actual revenue is estimated to be between $600m and $800m. This suggests that at a $20bn valuation, the implied revenue multiple ranges between approximately 25 to 33 times net revenue—an aggressive figure, though not unprecedented for rapid growth.

      The incident it wishes to move past

      These valuation discussions gain significance when considering the company’s situation from the spring. In March, a supply-chain attack targeting an open-source library, LiteLLM, compromised up to four terabytes of Mercor’s data, leading Meta, a significant client at the time, to suspend all collaboration indefinitely.

      This incident resulted in class-action lawsuits, with the hacking group Lapsus$ claiming responsibility.

      Mercor has stated that the impact was “very limited.” Foody frames the situation as a thing of the past, highlighting that OpenAI and Anthropic maintained their partnerships while revenues doubled in the subsequent months. This could either reflect strong customer loyalty or indicate that the labs needing training data of this magnitude have limited alternatives.

      The significance

      Mercor aims to control the entire training ecosystem: the environments for practice sessions, the experts grading performance, and the benchmarks that determine success. Numerous competitors are emerging, from Scale AI, valued around $29bn since Meta invested, to Surge AI, reportedly seeking close to $25bn.

      The market is vast, drawing strong interest from competing environment developers and the soaring paper valuations of the labs Mercor supports.

      Whether a $20bn valuation is justified or indicative of a speculative bubble remains contentious, with skeptics cautioning about potential overvaluation in AI. Mercor argues that its growth speaks for itself, but investors will ultimately need to evaluate if the growth—once accounting for contractor expenses, the data breach, and Foody’s personal investment—is truly worth twenty billion dollars.

      Alternatively, like OpenAI's prolonged journey towards going public, this valuation might be outpacing substantiated proof of worth.