Artificial intelligence (AI) has become one of the most dynamic and fast-moving industries of the 21st century. From powering chatbots and search engines to accelerating breakthroughs in healthcare, AI has positioned itself as the beating heart of the next digital economy. Yet as the industry races forward, new kinds of financial and strategic arrangements are beginning to attract scrutiny. One of the most talked-about—yet poorly understood—phenomena is the rise of so-called “circular deals.”

In this article, we’ll explore what circular deals are, why they’re becoming common in the AI space, and why regulators, investors, and ethicists are sounding alarms about their long-term consequences. The goal is to bring clarity to a term that could define the way AI innovation is financed, and potentially distorted, in the years to come.

Understanding “Circular Deals” in AI

At their core, circular deals describe arrangements where money flows in a loop rather than in a straightforward, transparent line. Typically, this happens when a large AI company invests in a startup, and that same startup then turns around and purchases expensive cloud credits, APIs, or services from the investor. On the surface, it looks like innovation funding. Underneath, however, the capital is cycling back to the original corporation, while inflating the appearance of growth and customer adoption.

For example: imagine Tech Giant A invests $100 million in Startup B. Soon after, Startup B spends $80 million of that funding on Tech Giant A’s cloud services or proprietary AI models. To outside observers, it appears that Startup B is both well-funded and scaling quickly, and Tech Giant A gains the dual advantage of market share and influence. In reality, the ecosystem is self-feeding. The money is moving in a circle rather than fueling genuine, independent innovation.

Why Circular Deals Are Spreading in the AI Sector

Circular deals are not unique to AI, but they’ve gained particular traction here due to a few industry-specific dynamics:

1. High Infrastructure Costs
   Training large language models (LLMs) or generative AI systems requires enormous computational resources. For many startups, cloud infrastructure can account for the majority of their burn rate. It’s natural for big cloud providers like Microsoft, Google, and Amazon to become both investors and vendors. Circular deals provide an apparent solution to this chicken-and-egg problem.

2. Hype-Driven Capital
   AI is experiencing a hype cycle similar to the dot-com boom of the late 1990s. Venture capital firms and big tech companies are desperate to find the “next OpenAI.” This urgency encourages looser definitions of success, and circular deals allow investors to demonstrate traction—fast.

3. Strategic Lock-In
   By funding startups that depend on their infrastructure, cloud providers ensure long-term vendor loyalty. Once a startup has built its entire architecture on a specific AI platform, switching providers becomes financially and technically painful.

4. Headline Value
   A $500 million funding round sounds spectacular in the press, boosting valuations and drawing more attention. The circularity behind such numbers often remains hidden from journalists and the public.

Why Critics Are Concerned

While circular deals might seem like clever financial engineering, they raise several concerns:

1. Market Distortion

Circular deals create the illusion of massive demand where there may be very little organic traction. This can skew market signals, making it hard for investors and regulators to distinguish between true growth and artificially inflated numbers.

2. Startup Dependency

Instead of empowering startups to innovate independently, circular deals can trap them in a corporate dependency loop. Startups spend the majority of their resources on infrastructure tied to their investor, leaving little room for experimentation, pivoting, or independent business development.

3. Barrier to Entry

Smaller, independent startups without access to large investors struggle to compete. If the only way to survive in AI is to get both funding and discounted infrastructure from one of a few tech giants, the industry risks consolidating around a handful of dominant players.

4. Regulatory Scrutiny

Antitrust regulators are starting to examine whether circular deals constitute anti-competitive practices. By funding companies only to force them back into closed ecosystems, tech giants may be creating walled gardens that restrict open competition.

5. Innovation Bottleneck

True innovation thrives on diversity of thought, tools, and ecosystems. Circular deals channel money into reinforcing existing platforms, potentially stifling new approaches that don’t align with the interests of the largest incumbents.

The Historical Parallels

Circular deals in AI echo past patterns in other industries. During the dot-com bubble, some telecom companies invested in internet startups that, in turn, became major customers of their bandwidth. Similarly, in the 2008 financial crisis, banks sold risky mortgage products while simultaneously betting against them through complex derivatives. In both cases, self-reinforcing cycles of capital obscured underlying fragility until collapse occurred.

The difference with AI is that the stakes are broader. We’re not just talking about overvalued companies—we’re talking about infrastructure that could define the next technological era.

Examples in the Current AI Landscape

Although specific company names often surface in financial press, the patterns are consistent:

• Big Tech and Generative AI Startups: When large corporations invest billions into startups building generative AI tools, the startups almost immediately channel much of that money back into purchasing cloud computing credits from the same investor.

• Strategic Alliances in Cloud AI: Startups building specialized AI solutions—say, for legal contracts or healthcare—accept funding with strings attached: a contractual requirement to host all workloads on the investor’s infrastructure.

• Model Licensing and Tokenization: Some companies receive investment on the condition that they will license specific AI models at scale, further feeding demand into the investor’s ecosystem.

These patterns blur the line between venture capital and customer acquisition, leaving many analysts concerned that the numbers driving AI’s meteoric rise may not reflect genuine economic activity.

The Ethical and Societal Angle

Beyond the financial mechanics, circular deals raise ethical questions:

• Transparency: Should startups disclose how much of their funding is effectively recycled back to their investors? Without this information, employees, users, and even governments may be misled about a company’s independence and sustainability.

• Concentration of Power: The AI industry already struggles with centralization. Only a handful of companies possess the resources to train cutting-edge models. Circular deals risk deepening this concentration, putting unprecedented power in the hands of a few corporations.

• Public Trust: The public is increasingly skeptical of how AI is being developed, especially with controversies over bias, data privacy, and job displacement. If the funding structures themselves appear opaque or manipulative, trust could erode further.

Possible Solutions and Reforms

Critics aren’t merely raising alarms—they’re also suggesting solutions to mitigate the risks of circular deals:

1. Greater Transparency
   Requiring startups and investors to disclose the percentage of funding spent on services from the investing company would allow regulators and the public to better assess the true health of the market.

2. Independent Infrastructure Grants
   Governments and non-profit organizations could offer cloud credits or computational grants that aren’t tied to corporate investors, giving smaller startups a fairer playing field.

3. Antitrust Oversight
   Regulators could investigate whether circular deals represent anti-competitive bundling. If so, restrictions might be needed to ensure startups can choose infrastructure freely.

4. Investor Education
   Venture capitalists and institutional investors must dig deeper into startup finances, ensuring that apparent traction isn’t simply the by-product of circular funding flows.

Why This Matters for the Future of AI

The conversation about circular deals isn’t just about finance—it’s about the shape of the AI industry for decades to come. If unchecked, circular deals could create an environment where only a few companies control the entire innovation pipeline, from raw compute to consumer-facing apps. Such centralization risks slowing the pace of discovery, narrowing the diversity of applications, and leaving societies more vulnerable to the interests of a small group of corporate actors.

On the other hand, if transparency and fair competition are prioritized, AI could flourish into a genuinely open ecosystem—where startups compete based on creativity, users benefit from real innovation, and the technology evolves in ways that reflect diverse human needs.

Final Thoughts

Circular deals may sound like clever corporate strategy, but they expose the fragility of today’s AI boom. Behind the headlines of billion-dollar funding rounds and revolutionary AI products lies a system where money often spins in closed loops. This practice doesn’t just raise financial questions; it touches on ethics, transparency, competition, and the long-term health of one of the most transformative technologies in human history.

If AI is to achieve its promise of reshaping industries and improving lives, it cannot afford to be built on financial smoke and mirrors. Addressing the risks of circular deals now will help ensure that the next chapter of AI is written not by the cleverest financiers, but by the most creative innovators.

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