When Microsoft originally invested $1 billion in OpenAI in 2019, the transaction attracted no more notice than a typical corporate venture round. The startup industry was exploding, and artificial intelligence, along with electric cars, smart logistics, and aerospace, was one of several industries drawing mega-valuations.
Three years later, the market has changed dramatically.
After the collapse of public market multiples for high-growth, money-losing tech businesses, startup investment has plummeted. The exception is artificial intelligence, more especially generative AI, which refers to systems that generate automatic text, visual, and audio answers.
No private firm is more popular than OpenAI. In November, the San Francisco-based business launched ChatGPT, a chatbot that quickly became popular due to its ability to construct human-like responses to users’ questions on practically any topic.
Microsoft’s once-unnoticed investment is suddenly a hot subject in venture capital and among public shareholders, who are attempting to figure out what it implies for the prospective value of their shares. Microsoft’s total investment in OpenAI is said to be $13 billion, with the firm valued at over $29 billion.
That’s because Microsoft isn’t simply throwing money towards OpenAI. It is also the weapons dealer, being the exclusive source of computer capacity for OpenAI’s research, products, and developer programming interfaces. Startups and major corporations, such as Microsoft, are scrambling to connect their products with OpenAI, resulting in huge workloads running on Microsoft’s cloud servers.
The technology is being integrated into Microsoft’s Bing search engine, sales and marketing applications, GitHub coding tools, Microsoft 365 productivity package, and Azure cloud. According to Michael Turrin, an analyst at Wells Fargo, that may all add up to more than $30 billion in additional yearly income for Microsoft, with Azure accounting for approximately half of that.
What does this signify for Microsoft’s investment and the overall agreement?
“It’s so good that I have investors asking me how they pulled it off, or why OpenAI would even do this,” Turrin said in an interview.
The financial ramifications, on the other hand, are anything from clear.
Bragging rights
OpenAI was established as a non-profit in 2015. The structure shifted in 2019, when two key executives announced the establishment of a “capped-profit” corporation dubbed OpenAI LP in a blog post. The existing system prevents the startup’s earliest investors from generating more than 100 times their money, while subsequent investors, such as Microsoft, receive smaller returns.
When Microsoft’s investment is repaid, it will get a share of OpenAI LP’s income up to the agreed-upon maximum, with the remainder going to the nonprofit organisation, according to an OpenAI representative. A Microsoft representative declined to comment.
In a 2019 Reddit comment, Greg Brockman, an OpenAI co-founder and one of the blog post’s writers, stated that the system “feels commensurate with what they could make investing in a pretty successful startup (but less than what they’d get investing in the most successful startups of all time!).”
It’s an unusual paradigm in Silicon Valley, where the venture industry has always prioritised increasing returns. That also doesn’t make sense to Elon Musk, one of OpenAI’s founders and early backers. Musk has expressed his worries about OpenAI’s unorthodox structure and its ramifications for AI on many occasions this year, particularly considering Microsoft’s degree of ownership.
″OpenAI was created as an open source (which is why I named it ‘Open’ AI), non-profit company to serve as a counterweight to Google, but now it has become a closed source, maximum-profit company effectively controlled by Microsoft,” Musk tweeted in February. “Not what I intended at all.”
On Reddit, Brockman stated that if OpenAI is successful, it will “create orders of magnitude more value than any company has to date.” Microsoft would profit as an OpenAI investor.
Apart from its investment, Microsoft’s reliance on OpenAI has the potential to help it radically reverse its fortunes in AI, where it has openly struggled and failed to develop a major company on its own. Microsoft removed the Clippy Word helper, Cortana from the Windows taskbar, and its Tay Twitter chatbot.
Unlike in advertising or security, Microsoft hasn’t revealed the size of its AI business, while CEO Satya Nadella stated in October that income from its Azure Machine Learning service has quadrupled for four consecutive quarters.
At the very least, Nadella’s involvement with OpenAI has earned him bragging rights. Here’s what he stated in December, a month after ChatGPT was released, at Microsoft’s annual shareholder meeting:
“When I think about Azure, one of the things that we have done, in fact, in the context of even ChatGPT, which today is one of the more popular AI applications out there, guess what? It’s all trained on the Azure supercomputer.”
Microsoft conducted a press event in February at its Redmond, Washington headquarters to showcase new AI-powered improvements to its Bing search engine and Edge browser. One of the prominent speakers was Altman.
Since then, the Bing chatbot has had several widely publicised and unsettling exchanges with users, as well as serving out some wrong responses at launch. Fortunately for Microsoft, the launch of Google’s competitor Bard AI service was unimpressive, with staff describing it as “rushed” and “botched.”
Notwithstanding the early setbacks, interest for new technologies based on large language models, or LLMs, is apparent throughout the technology sector.
The basis of OpenAI’s bot is an Algorithm dubbed GPT-4, which has learnt to write natural-sounding language after being trained on large amounts of web material. According to an OpenAI spokesman, Microsoft holds an exclusive licence on GPT-4 and all other OpenAI models.
There are several different LLM programmes available.
Google said last month that it has granted select developers early access to an LLM dubbed PaLM.
AI21 Labs, Aleph Alpha, and Cohere are among the startups that provide their own LLMs, as does Google-backed Anthropic, which has chosen Google as its “preferred” cloud provider. Anthropic cofounder Dario Amodei, who was previously vice president of research at OpenAI, has highlighted worries about AI’s unfettered power, as have Altman and Musk.
Anthropic filed as a public-benefit company in Delaware in 2021, indicating its desire to have a good influence on society while pursuing profits.
“We were and are focused on developing innovative structures to provide incentives for safe development and deployment of AI systems and will have more to share on this in the future,” an Anthropic spokesperson told CNBC in an email.
One thing is evident across the industry: it’s early days.
Quinn Slack, CEO of code-search firm Sourcegraph, said he hasn’t seen evidence that Microsoft’s OpenAI agreement has provided it a significant edge, despite calling OpenAI the top LLM supplier.
“I don’t think people should look at Microsoft and say they’ve totally locked up OpenAI and OpenAI is doing their bidding,” Slack said. “I truly believe people there are motivated to build amazing technology and make it as widely used as possible. They view Microsoft as a great customer but not someone that’s controlling. That’s good, and I hope it stays that way.”
OpenAI has plenty of skeptics. Late last month the nonprofit Center for Artificial Intelligence and Digital Policy called on the Federal Trade Commission to stop OpenAI from releasing new commercial releases of GPT-4, describing the technology as “biased, deceptive, and a risk to privacy and public safety.”
With its intimate connection with OpenAI, Microsoft — which does not have a seat on the OpenAI board — would be the obvious buyer. Yet, such a transaction would almost certainly be subject to regulatory scrutiny due to worries about AI and Microsoft restricting competition. Microsoft might dodge Hart-Scott-Rodino investigations from US competition regulators by being an investor and not becoming the owner of OpenAI.
“I’ve gone through it. It’s painful,” said David Zilberman, a partner at Norwest Venture Partners.
According to Scott Raney, managing director at Redpoint Ventures, the most likely future for OpenAI based on its current price is an eventual IPO.
According to PitchBook statistics, OpenAI is on track to create $200 million in revenue this year, a 150% increase from 2022, and $1 billion in 2024, a 400% increase.
“When you raise at a $30 billion valuation, it’s kind of like, there’s no turning back at that point,” Raney said. You’re saying, “Our plan is to be a big independent standalone company.”
According to a spokeswoman for OpenAI, there are no intentions for the company to go public or be bought.
