Last Friday, Wall Street “discovered” Nebius. It was revealed in Nvidia’s latest 13F filing as one of its newest investees, along with WeRide, a Chinese self-driving company.
I put “discovered” in quotes because for those of us paying attention, this “mystery” has been in the public for three months. In early December, Nebius announced Nvidia’s investment into the company along with the storied Silicon Valley VC firm, Accel, for $700 million. It was a PIPE deal priced at $21 per share. It is a secret hiding in plain sight.
If you are a regular reader of this newsletter, Nebius has made appearances before. In my last post in 2024, I talked about AI neoclouds with software strengths as a key investment theme of mine. In my annual letter for my fund, Nebius was one of the members of the portfolio.
Now that the proverbial cat is out of the bag, let’s discuss why I find Nebius to be one of the most compelling, pure-play ideas in the AI neocloud space, among a sea of AI neoclouds, not to mention the big bad hyperscalers.
Smooth Developer Experience
As the starting point of my investing process, I tap into my inner spirit animal as a developer and technologist to evaluate the “developer experience” or DevEx of a product. For those who aren't developers, this DevEx notion can basically be summed up as: how easily and cheaply can I build something cool or kick the tires. It is the “time to value” measurement for programmers.
Nebius arguably has the best DevEx among all the AI neoclouds.
It takes two to three clicks to create an account with my GitHub credential (which every developer has). Nebius’s AI Studio platform gives me a free dollar to play around with all the open source models it hosts in a “Playground” mode, where I can adjust settings and parameters – the classic “kick the tires” mode.
One dollar doesn’t sound like much, but given how quickly AI model consumption has gotten so cheap, and the trend is only going to continue, a dollar to kick the tires can go a long way. What’s more valuable in this experience, or flow, is that a developer does not need to give any credit card information or put in a billing address to get started. Removing this friction, and every other possible friction, along the way is invaluable in DevEx.
If I only get one word to describe Nebius’s DevEx, it would be smooth.
Removing friction may seem like an obvious thing to do in consumer technology products. But in the world of business or enterprise technology, even though a developer is just a consumer of technology, the maniacal optimization of friction-removal still lags behind. This is evident in all the more well-known AI neoclouds.
Want to kick the tires on CoreWeave? I have to “Request a Meeting” that sends me to a contact form for me to tell CoreWeave more about myself. No thank you!
As for Crusoe and Lambda Labs, I can get a bit farther by easily self-registering an account, but I get stuck needing to put in a billing address, before I’m allowed to do anything useful. No free dollar for me!
It is the same lack of DevEx with Iris Energy, Hut 8, and other n+1 AI neoclouds or data center infrastructure builders.
This is not surprising, because the vast majority of these AI neocloud players started out as bitcoin miners or energy arbitrageurs, not technologists or application builders. Energy expertise is extremely important because energy is the most important raw input to compute, and compute is the most important input to AI knowledge generation. So the rise in prominence (and valuation) of energy experts in the AI field is somewhat justified.
However, the generative AI industry needs to graduate from energy arbitrage and raw-GPU-for-rent to building useful applications at scale sooner or later. This year, in my view, is Year One of this transition. Thus, AI clouds big or small with smooth, superior DevEx will become increasingly more appealing.
Nebius is already ahead in this dimension. How did this newcomer gain this advantage?
Seasoned Operator
Nebius is not so much a new company as it is an old company reborn.
A casual googling of the company will surface its origin as the ex-Russia business of Yandex. Yandex is, of course, the best Internet company born out of the Russia with a search engine, news service, ride-hailing, food delivery, autonomous driving, and a bunch of other tech businesses, making it a conglomerate that more closely resembles a Chinese superapp company than Google (even though "Google of Russia” is the most common analogy you will see).
The most relevant part of the Yandex empire for the Nebius story is its data center outside of Russia and its cloud business. Yes, Yandex used to run a cloud. Interestingly, a lot of regional or country-specific search engine companies also have a cloud service. Baidu has Baidu Cloud in China. Naver has Naver Cloud in South Korea. Yandex used to have Yandex Cloud for Russia and other parts of Europe.
That’s why the Nebius crew is ahead in DevEx and all the small details but important details that attract and delight developers. The team of more than 850 engineers seasoned in AI/ML and cloud industry already know how to run a cloud service for developers – the core audience of any successful cloud business. This shows up in important ways. If you access the Nebius Cloud, it does not only offer a menu of GPU types, as is the case for most other AI neoclouds, but a comprehensive list of other managed services of all the table stakes components of a cloud infrastructure – databases, CI/CD pipelines, Kubernetes, data streamlining, and the list goes on.
Now, if you click a layer deeper, many of these services are still in preview or beta mode, because the company was just reconstituted less than six months ago, as the “everything outside of Russia" part of Yandex. But the offerings listed show a clear roadmap that Nebius intends to be a full-service cloud, not just a GPU-for-rent service.
This caters well to the AI application transition phase that the industry is going through right now, because you still need all the other components of cloud infrastructure, beyond GPUs and models, to build scalable and production-grade applications. And Nebius ala Yandex Cloud has done it before.
Being Russian
The biggest knee-jerk worry for any investor when it comes to Nebius is its Yandex, and by extension, Russian roots. This newly constituted company is literally newborn out of the ashes of a war – Russian invasion of Ukraine.
The entire geopolitical story has a lot of twists and turns, but the most salient details are:
- Russia invaded Ukraine in February 2022
- Almost immediately after, Yandex was delisted from the NASDAQ as part of the sanctions on Russia
- Yandex’s founder and CEO, Arkady Volozh, was later put on the EU’s sanctions list, even though he publicly condemned Putin’s invasion, taking on massive personal and business risks
- Volozh was forced to sell all the Russia part of Yandex to a group of investors at 50% discount per Russian law, as an effort to completely remove himself and his business from Russia
(A fun piece of trivia of this transaction for the geopolitical nerds: the selling of the Yandex Russia business was done in RMB because the company could not access US dollars due to sanctions.)
- The results of this divestment are all the non-Russia Yandex assets, which became Nebius. This includes a data center in Finland, $2.3 billion cash pile, and an assortment of other divisions, which we talk about in “Nebius Part 2” as potentially interesting optionalities.)
- Volozh was removed from the EU sanction list in February 2024, two years after the war started
- NASDAQ notified the company that it can resume its listing on the exchange on October 21, 2024
- Nvidia, Accel, and accounts managed by Orbis Investments made the $700 million investment in December 3, 2024, giving Nebius a roughly $3 billion cash war chest to expand its data center footprint beyond Finland to other parts of Europe and the US
The Nvidia investment, which is how most people will have first heard of Nebius, is not surprising and one of the few benefits of being connected to Yandex. Once upon a time, Yandex was Nvidia’s largest customer outside of the US and China. Nvidia knows that Yandex engineers have the experience to make the best use out of its hardware, which is an important consideration to earning its investment and a closer long-term partnership.
As for its overall Russian heritage, legally speaking, Arkady is no longer on any sanctions list. His new company is properly listed on the NASDAQ just like Meta and Alphabet. He has also understandably re-branded himself as an “Israeli tech entrepreneur born in Kazakhstan”. We see this eraser of one’s heritage sadly too often as geopolitical events have made many entrepreneurs collateral victims; just ask any well-meaning Chinese tech entrepreneurs in the last ten years.
Furthermore, Trump’s presidency has increased the odds of the Russian-Ukraine war ending sooner rather than later, possibly happening this year. Many motions are already afoot toward this end in just the last week. (Note: this is not a commentary on the justification and wisdom of if, why, and how this war would or should end. It is only an analytical commentary on the likelihood of this war ending.)
Thus, “being Russian” should be seen as less and less of a burden, most likely becoming a non-factor in a year or two, clearing the way for Nebius to grow, execute, and compete without the exorbitant hassle of navigating geopolitical dynamics.
There is more to the Nebius story, opportunity, and risks, which I’ll discuss in “Nebius Part 2: Cash, Optionalities, Challenges”.