Breaking the Loop: How Boards Can See Through Circular AI Ecosystems

Series 2: Circular Capital — The AI Industry’s Breton Pulley Problem

1 When Innovation Meets Reflexivity

AI’s commercial landscape now resembles a Möbius strip — investors, customers, and suppliers all feeding each other’s growth narratives.In Part 1 we mapped these loops. In Part 2 we showed how they generate synthetic leverage.Now, in Part 3, Bridge Connect asks: how do boards, investors, and regulators break the cycle before it breaks them?

"The only thing harder than finding the loop is admitting you’re inside it.”

2 Why Circular Capital Persists

Circularity is seductive. It guarantees growth optics, smooths quarterly results, and reassures markets that demand is limitless.Boards allow it to persist because it appears to work — until it doesn’t.

The same psychology underpinned the Breton Pulley era: founders convinced that internal control equals external stability.AI’s leaders are repeating that comfort pattern through interlocking contracts instead of cross-holdings.

3 The Governance Challenge

Traditional governance frameworks are built for ownership clarity — not contractual opacity.When capital and revenue loops are constructed through partnerships, credits, or vendor-financing, they fall outside the scope of most disclosure laws.

Boards must therefore govern for economic substance, not merely legal form.

Governance Focus	Old World	AI Ecosystem
Disclosure requirement	Shareholding transparency	Contractual dependency mapping
Control test	Voting rights	Data, compute, and supply control
Conflict risk	Insider trading	Dual role: investor and vendor
Systemic risk	Financial contagion	Capacity and dependency contagion

4 Bridge Connect’s “Circular Capital Audit” Framework

Bridge Connect has adapted its Pulley Audit methodology to digital-era ecosystems.Boards can use this as a repeatable process to test for circular capital exposure.

Step 1 — Map the Ecosystem

• Graph all investment, supply, and partnership relationships.

• Include off-balance-sheet capacity commitments and cloud credits.

• Visualise loops.(If you can’t draw it on one page, you probably don’t understand it.)

Step 2 — Trace the Flows

• Follow cash, compute credits, and equity movements over time.

• Identify where the same dollar or GPU appears multiple times.

• Mark mirror revenues and recycled capital.

Step 3 — Quantify Dependency

• Measure what % of revenue comes from invested customers or partners.

• Flag if more than 25% of growth originates within the loop.

Step 4 — Stress-Test the System

• Model a slowdown: what happens if one partner reduces spend or cancels a contract?

• Simulate valuation contagion across the network.

Step 5 — Enhance Disclosure

• Report contractual dependencies alongside financial investments in annual filings.

• Identify shared directors, data-sharing agreements, and backstop guarantees.

Step 6 — Simplify Strategically

• Replace circular commitments with open-market contracts.

• Diversify customer and supplier bases.

• If investment and supply must coexist, set explicit firewalls between governance teams.

5 The Role of Regulators and Auditors

Regulators

• SEC is considering new rules for “significant interdependent commercial relationships.”

• EU is expanding beneficial-ownership rules to include indirect control via long-term supply contracts.

• UK FCA plans to integrate “contractual control loops” into the PSC framework by 2026.

Auditors

Traditional financial audits are insufficient. Boards should request ecosystem audits — independent mapping of capital, contracts, and compute flows.

Bridge Connect advocates adding a Circular Dependency Note to financial statements: a short disclosure outlining the proportion of intra-ecosystem revenues.

6 Investor Pressure Is Rising

Investors now price governance transparency as a premium.

• ESG-aligned funds are developing metrics for supply-chain independence.

• Sovereign and pension funds ask whether AI portfolios are inflated by recycled demand.

• Credit agencies increasingly apply “concentration penalties” for circular contracts.

The result: transparency reduces cost of capital, while opacity compounds it.

“In the new capital markets, sunlight is collateral.”

7 Lessons from Telecom and Infrastructure

Bridge Connect’s telecoms experience offers direct analogies:

• Vendor Financing (2000s): equipment makers lent to operators to fund their own sales — creating the illusion of demand until defaults cascaded.

  
  

• Capacity Swaps (early 2000s): carriers booked revenue from each other for unused fibre — inflated income, zero cash.

  
  

• TowerCo Spinouts (2010s): mutual leaseback deals boosted EBITDA but created new dependency loops.

AI’s circular financing is simply the latest digital variant of a familiar pattern.

8 Breaking the Loop: Practical Board Actions

1. Independent Materiality Thresholds — Require that at least 70% of annual revenue derives from customers with no equity or governance link.

   
   

2. Firewalled Partnerships — Separate governance oversight for investment arms and vendor divisions.

   
   

3. Disclosure-by-Design — Embed relationship mapping into ERP and compliance systems, not as post-hoc reporting.

   
   

4. Scenario Sign-Off — Major contracts with investee companies should undergo independent stress testing.

   
   

5. Exit Clauses — Build optionality to unwind circular contracts if valuation or regulatory conditions change.

   
   

Boards that apply these steps will convert risk management into competitive advantage.

9 The Wider Systemic Question

Circular AI financing has macroeconomic implications.If 30–40% of reported AI infrastructure demand proves to be internally funded, the sector could face a valuation reset similar to the telecoms overbuild of the early 2000s.

But unlike hardware or fibre, today’s loops involve compute and data dependencies — assets that decay quickly if underutilised.Breaking loops early is therefore an act of prudence, not pessimism.

10 Bridge Connect’s Role

Bridge Connect advises boards, investors and sovereign funds on:

• Structural Transparency — mapping ownership and contract ecosystems.

• Risk Governance — integrating structural audits into board cycles.

• Strategic Simplification — identifying which loops to retain (for resilience) and which to unwind (to restore independence).

Our view: AI’s growth should rest on open markets, not closed circles.

“Circular capital is clever finance — but transparent governance is better business.”

11 Conclusion — From Illusion to Integrity

Circular AI ecosystems are not inherently bad; they are evolution’s shortcut to scale.But loops that hide risk erode trust, and trust is the substrate of capital.

The Breton Pulley taught us that opacity masquerading as strength is a fragile foundation.The AI industry has a chance to learn that lesson early — by making transparency its next great innovation.