Mercor targets a $20 billion valuation and acquires Deeptune.

      A three-year-old startup led by a 23-year-old is negotiating to increase its valuation to $20 billion. The figures are impressive; however, it's important to read the fine print.

      Mercor, an AI training marketplace, has informed investors that it can secure funding at a $20 billion valuation, claiming to possess at least one term sheet at that amount, as reported by Bloomberg. These discussions are just starting, and a finalized deal may not materialize.

      The rapid growth is striking, as Mercor last raised funds in October at a $10 billion valuation, and just nine months later, investors are being approached for double that amount.

      The company employs industry experts like engineers, lawyers, and doctors, pairing them with AI labs requiring human judgment for training advanced models. Their clientele includes OpenAI, Anthropic, and Google. Its founders, three former high-school debate teammates who dropped out of college, became the world’s youngest self-made billionaires at age 22.

      A notable acquisition

      On the same day, Mercor disclosed its acquisition of Deeptune, a startup that creates simulated environments for AI agents to practice their tasks before actual deployment—similar to a flight simulator, but for learning to use software like spreadsheets or Salesforce. Mercor confirmed this transaction on its blog, but specific terms were not revealed.

      There’s a notable aspect here: Andreessen Horowitz led Deeptune's $43 million funding round in March, with Brendan Foody, Mercor’s CEO, as one of the angel investors. Just three months later, his company acquired Deeptune.

      Foody openly shared that the angel investment was made with the intention of a future acquisition in mind, indicating that it was a significant motivator for the investment.

      It's unclear whether Mercor's board or outside investors reviewed his personal investment prior to the deal concluding, a critical question raised by the $20 billion valuation.

      The revenue claim requires clarification

      Foody mentioned that Mercor’s annualized revenue run rate has surpassed $2 billion, essentially doubling in four months. While this headline may be accurate, the details are more revealing.

      The $2 billion figure refers to gross billings, not the company's net revenue. Contractors take home around 60 to 70 percent of all billed amounts, as per an earlier report by The Information. After factoring in the experts who perform the work, Mercor’s actual revenue is estimated to be between $600 million and $800 million. At a $20 billion valuation, this suggests a multiple of about 25 to 33 times net revenue, which is bold but not unprecedented for such rapid growth.

      A past the company wishes to move on from

      The discussions regarding valuation are particularly notable considering the company's situation last spring. In March, a supply-chain attack on an open-source library named LiteLLM exposed up to four terabytes of Mercor's data, leading Meta—a significant customer at the time—to halt all collaborations indefinitely.

      Following this, class-action lawsuits emerged, with the hacking group Lapsus$ claiming responsibility.

      Mercor asserts that the repercussions were "very limited." Foody refers to this incident as history, highlighting that both OpenAI and Anthropic continued their partnerships and revenue doubled in the time since. This could either indicate strong customer loyalty or suggest that the labs needing training data at this level have limited alternatives.

      The importance of this situation

      Mercor now aims to control the entire training process: the environments for practice, the experts who evaluate performance, and the benchmarks for success. Competitors are closely behind, from Scale AI, valued around $29 billion since Meta's investment, to Surge AI, which is reportedly raising funds close to $25 billion.

      The market is vast, attracting significant investment from competing environment developers and the soaring valuations of the labs that Mercor supports.

      Whether $20 billion is a justified valuation or merely an indicator of a speculative bubble, skeptics continue to caution about inflation in the AI sector. Mercor's response is its growth trajectory. Investors will need to determine if, once the contractors, security breaches, and the founder's personal stake are accounted for, the company's actual worth justifies a $20 billion price tag.

      Or if, similar to OpenAI’s extended wait to go public, the valuation is outpacing substantiated value.