“Microsoft Is Weighing $10 Billion Investment in OpenAI, Sources Say”, 2023-01-10 ():
Microsoft is planning to invest up to $10 billion into the artificial intelligence startup OpenAI, according to sources familiar with the matter.
OpenAI, the startup behind the viral chatbot ChatGPT that has helped create a fervor among investors for companies working on so-called generative AI, has been in talks to raise additional capital from Microsoft, which had previously invested $1 billion in the startup in 2019 and could use the technology to supercharge a variety of its software products. It is unclear whether the $10 billion would be fully in cash or whether that figure includes the value of services Microsoft will provide as part of its partnership with OpenAI.
Microsoft’s potential investment is separate from efforts underway by a group of venture capitalists to scoop up shares from OpenAI employees and other insiders in a secondary market transaction that could value the company at around $29 billion. The Wall Street Journal first reported the valuation figure of the tender offer, and it was independently verified by Fortune. Terms are not finalized and could still change for both the Microsoft investment and the tender offer.
Under the terms of the deal, Microsoft would be entitled to 75% of OpenAI’s profits until it earns back its initial investment, according to Semafor, which first reported the figure of the planned investment. After that threshold is reached, Microsoft would have a 49% stake in OpenAI with other investors taking another 49%, and OpenAI’s nonprofit parent getting 2%, the publication reported, without saying what stake Microsoft controls until that point.
…The San Francisco-based AI startup is projecting $1 billion in revenue by 2024, as was first reported by Reuters and independently verified by Fortune. OpenAI only generated ~$0.035b in revenue in 2022, sources say, and the company is heavily loss-making at the moment. One of the startup’s revenue streams is its integration with enterprises using its API. The company, which still considers itself primarily a research organization, has been focused on developing its technology and not on monetization. But some of the company’s AI models are being made available to business and government customers of Microsoft’s Azure cloud computing services. It is not clear how much of that money flows back to OpenAI.
…In 2019, the company converted from being a nonprofit into a “capped-profit corporation.” Investors will have the maximum returns they can realize capped at a set multiple of their initial investment on the premise that if the company succeeds in its mission of creating AGI, it will be the most valuable company on the planet by some order of magnitude. It has been widely reported that the first set of funders in OpenAI following this change in corporate structure have had their returns capped at about 100× their investment.
…OpenAI is planning to use the capital from this fundraise for computing resources, research, and staff costs, sources tell Fortune.
OpenAI’s other investors include Hoffman’s charitable foundation and Khosla Ventures. Last year, Sequoia Capital, Tiger Global Management, Bedrock Capital, and Andreessen Horowitz reportedly purchased shares from pre-existing shareholders in a sale valuing the company at around $20 billion, according to The Information.