Microsoft CEO Satya Nadella participates in an interview at the company’s headquarters in Redmond, Wash., March 15, 2023.
Chonna Kasinger | Bloomberg | Bloomberg | Getty Images
When Microsoft first invested $1 billion in OpenAI in 2019, the deal didn’t get as much attention as your average corporate venture round. The startup market was hot, and artificial intelligence was one of the many areas garnering huge recognition, along with electric vehicles, advanced logistics, and aerospace.
Three years later, the market looks very different.
Startup funding has plummeted after public market multiples of high-growth, loss-making tech companies collapsed. The exception is artificial intelligence, especially generative AI. It refers to technology focused on generating automated text, visual, and voice responses.
No private company is as popular as OpenAI. In November, the San Francisco-based startup introduced his ChatGPT. This is a chatbot that has rapidly become popular thanks to its ability to create human-like responses to user queries on almost any topic.
Microsoft’s once-obscure investment is now a major topic of discussion in venture circles and among public shareholders trying to understand what it means for the potential value of their stock. Microsoft’s cumulative investment in OpenAI has ballooned to $13 billion, reportedly bringing the startup’s valuation to around $29 billion.
Because Microsoft isn’t just opening up a fat wallet for OpenAI. It is also an arms dealer, as the sole provider of computing power for OpenAI’s research, products, and programming interfaces for developers. Startups and multinationals, including Microsoft, are rushing to integrate their products with his OpenAI. This means a huge workload running on Microsoft’s cloud his servers.
Microsoft integrates this technology into its Bing search engine, sales and marketing software, GitHub coding tools, Microsoft 365 productivity bundles, and the Azure cloud. Wells Fargo analyst Michael Turrin says that in total Microsoft’s new annual revenue could exceed $30 billion, about half of which will come from Azure.
What does this mean for Microsoft’s investment and wider deal?
“It’s very nice to have investors asking how we did it and why OpenAI is doing this,” Turrin said in an interview.
However, the financial implications are not straightforward.
OpenAI was founded in 2015 as a non-profit organization. The structure changed in 2019, when two of his top executives published a blog post announcing the formation of a “capped profit” entity called his OpenAI LP. The current setup restricts the startup’s first investor from making more than 100x his earnings, with lower returns for later investors such as Microsoft.
After Microsoft’s investment is recouped, it will receive a portion of OpenAI LP’s profits, up to an agreed cap, and the rest will flow to the nonprofit, an OpenAI spokesperson said. A Microsoft spokeswoman declined to comment.
Greg Brockman, co-founder of OpenAI and one of the authors of the blog post, said in a 2019 Reddit comment that for investors, the system was “worth what you get for investing in a fairly successful startup. (But invest in their most successful startup of all time!)”
This is an unfamiliar model in Silicon Valley, where maximizing revenue has long been a priority for the venture community. It also doesn’t make much sense to Elon Musk, who was one of OpenAI’s founders and early backers. Several times this year, Musk has tweeted his concerns about OpenAI’s unconventional structure and its implications for AI, especially given Microsoft’s level of ownership.
“OpenAI was created as an open source, non-profit enterprise to compete with Google (hence why I named it “open” AI). Musk tweeted in February. “Not what I intended.”
Brockman said on Reddit that if OpenAI succeeds, it will “create orders of magnitude more value than any company has ever done before.” As a major investor in OpenAI, Microsoft will benefit.
Investments aside, relying on OpenAI could help Microsoft dramatically reverse the fortunes of an AI that has openly stumbled and failed to build a meaningful business on its own. Microsoft has removed Clippy Assistant from Word, Cortana from the Windows taskbar, and the Tay chatbot from Twitter.
Unlike areas like advertising and security, Microsoft doesn’t disclose the size of its AI business, but CEO Satya Nadella said in October that revenue from Azure Machine Learning services had doubled for the fourth straight quarter. says.
At least, working with OpenAI has given Nadella something to brag about. At his Microsoft annual shareholder meeting in December, a month after ChatGPT was launched, he said:
“When you think about Azure, in fact, even in the context of ChatGPT, one of the most popular AI applications today, ChatGPT, do you think that’s one of the things we’ve done? They are trained on computers.”
In February, Microsoft held a press event at its Redmond, Washington headquarters to announce new AI-powered updates to its Bing search engine and Edge browser. Altman was one of his featured speakers.
Since then, the Bing chatbot has been engaging in highly publicized spooky conversations with its users, and it’s been a bumpy road as it has provided several incorrect answers at launch. In a bit of luck for Microsoft, Google’s rollout of its rival Bard AI service was disappointing, with employees describing it as “hurried” and “failed.”
Despite early problems, enthusiasm for new technologies based on Large Language Models (LLMs) is evident across the technology industry.
At the core of OpenAI’s bots is an LLM called GPT-4. This LLM has learned to produce natural-sounding text after being trained on a wide range of online information sources. Microsoft has exclusive licenses for GPT-4 and all other OpenAI models, said an OpenAI spokesperson.
There are many other LLMs.
Last month, Google announced that it was giving some developers early access to an LLM called PaLM.
Startups AI21 Labs, Aleph Alpha, and Cohere all offer their own LLMs, and Google-backed Anthropic has also selected Google as its “preferred” cloud provider. Like Altman and Musk, Anthropic co-founder and former vice president of research at OpenAI, Dario Amodei, has raised concerns about the unlimited power of AI.
Anthropic will be registered as a public benefit corporation in Delaware in 2021. This implies the intention to have a positive impact on society while pursuing profit.
An Anthropic spokesperson said in an email to CNBC, “We are committed to developing innovative structures to provide incentives for the safe development and deployment of AI systems and will continue to share this. is,” he said.
One thing is clear across the industry. It’s still in its infancy.
Quinn Slack, CEO of code search startup Sourcegraph, which calls OpenAI the top LLM provider, said he sees no evidence that a partnership with OpenAI has given Microsoft any significant advantage.
Slack said: “I truly believe that the people there are motivated to build great technology and use it as widely as possible. I don’t think it’s human.
OpenAI has many 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, calling the technology “biased and deceptive.” and a risk to privacy and public safety.”
When considering OpenAI’s potential exits, Microsoft (which does not hold a seat on OpenAI’s board of directors) would be a natural acquirer given its close entanglements. But this kind of deal could come under regulatory scrutiny due to concerns about stifling competition by AI and Microsoft. By remaining an investor and not becoming an owner of OpenAI, Microsoft was able to avoid a Hart-Scott-Rodino review by US competition regulators.
David Zilberman, partner at Norwest Venture Partners, said:
Scott Raney, managing director of Redpoint Ventures, said an eventual IPO is more likely based on OpenAI’s existing valuation.
OpenAI is on pace to generate $200 million in revenue this year, up 150% from 2022, and $1 billion in 2024, representing a 400% growth, according to PitchBook data.
“If you raise at a $30 billion valuation, at that point it’s kind of irreversible,” Raney says. You say, “Our plan is to be a big independent independent company.”
A spokeswoman for OpenAI said it has no plans to go public or make an acquisition.
clock: Why ChatGPT is a Game Changer for AI
