Nvidia, Microsoft, SoftBank and Cathie Wood’s Ark Invest are betting big on this AI startup

OpenAI was founded in 2015 by a team of researchers and entrepreneurs that included Sam Altman, Peter Thiel and adze CEO Elon Musk. It was founded as a non-profit research organization with a mission to develop artificial intelligence (AI) technology to benefit all of humanity.

OpenAI planned to raise $1 billion through donations to achieve its research and development goals. After receiving only $130.4 million in donations in the early years, the organization decided to create a new subsidiary in 2019, which was able to generate capped profits to attract investors.

Since then, OpenAI has developed some of the world’s most advanced AI models, which underpin its ChatGPT chat bot application. Now, OpenAI is looking to expand its lead in the AI ​​industry by fully committing to a for-profit structure, and has just accepted a whopping $6.6 billion in new investment from the likes of Nvidia (NVDA 1.69%), Microsoft (MSFT -0.11%), SoftBank (SFTB.Y 0.84%)Cathie Wood Invest Ark and more.

Image source: Getty Images.

The shift to a for-profit AI powerhouse

This isn’t the first mega capital raise that OpenAI has closed. Shortly after opening its profit-capped subsidiary in 2019, it entered into a strategic partnership with Microsoft that included a $1 billion cash injection. The two companies have agreed to collaborate on AI development, with a specific goal of helping expand the AI ​​capabilities of Microsoft’s Azure cloud computing platform.

Then, in early 2023, Microsoft said it would invest another $10 billion, spread over several payments over time.

Because the terms of the deal were never fully disclosed — and given OpenAI’s current structure — it’s unclear whether Microsoft got a run for its money. But it has been widely reported that Microsoft would be entitled to 49% of OpenAI’s future profits, if and when it can generate it.

The $6.6 billion fundraising that OpenAI just completed, however, could involve equity. According to Reuters, participating investors will receive convertible notes, which are a debt instrument, and convert into equity after OpenAI formally establishes a “public benefit corporation.” It’s a corporate structure that will allow OpenAI to make money while maintaining its social mission.

Investors from this last round (according to The Wall Street Journal and Business Insider) include:

• Nvidia, which invested about 100 million dollars.
• Cathie Wood’s Ark Venture Fund, which has invested $250 million.
• SoftBank, which invested $500 million.
• Microsoft, which invested less than $1 billion.
• Thrive Capital, which invested $1.25 billion, with an option to invest another $1 billion next year if OpenAI meets a certain revenue goal.
• MGX, a venture firm backed by the United Arab Emirates.
• Altimeter Capital, which is led by veteran technology investor Brad Gerstner.
• Tiger Global.
• Fidelity.
• Khosla Ventures.

There is no guarantee that OpenAI can transition to a for-profit enterprise

The establishment of the for-profit entity is subject to the approval of the board of directors that oversees the nonprofit arm of OpenAI. Typically, due to the nature of convertible notes, investors would be entitled to their money back if the transition fails.

Additionally, the nonprofit arm owns the intellectual property (IP), which includes all of the AI ​​models and infrastructure that led to ChatGPT, and forming a for-profit entity cannot leave the nonprofit arm (legally) worse off. In other words, even if the investors own shares in the new for-profit corporation, it’s unclear whether they’ll own a stake in any of the actual IP or anything else that makes OpenAI so valuable.

On October 3, CNBC reported that OpenAI received a $4 billion credit line from a collection of banks, including JPMorgan Chase, Goldman Sachs, City Groupand many others. This will give the start-up a buffer if it encounters problems with its capital transaction.

OpenAI is growing like a weed

ChatGPT has approximately 350 million monthly active users. Most of them use it for free, but a small number pay a $20 per month subscription for early access to new features, higher file limits, and more message tokens. OpenAI also licenses its AI models (such as GPT-4) to developers, who can use them to create their own AI software applications for a fee.

It looks like OpenAI is poised to generate $3.7 billion in revenue by 2024. With the recent fundraising valuing the company at $157 billion, this puts it at a price-to-sales ratio (P/S) of of 42.4 – in other words, it’s even more expensive than Nvidia.

However, OpenAI expects its revenue to grow 213% to $11.6 billion in 2025, and according to its long-term forecast, its revenue could exceed $100 billion a year by 2029. If it hits those targets, its current valuation will win” doesn’t look so bad in hindsight.

However, OpenAI will require a significant the amount of capital to get there. Reports suggest it will post a $5 billion loss this year, meaning the combined $10 billion in funding it is set to receive from investors and banks will barely last two years.

Can ordinary investors buy shares in OpenAI?

Not yet. OpenAI is a private company, so it can choose which investors it wants to work with. Accepting large sums of money from a small number of backers is much easier than offering pieces of the company to millions of smaller investors. Additionally, having partners like Nvidia and Microsoft on board as equity holders creates important synergies, as we pointed out earlier.

Altimeter Capital’s Brad Gerstner says the start-up’s next move should be an initial public offering (IPO), which would allow regular investors to share in its future success.

For now, one way investors could gain exposure to OpenAI is by buying shares in Microsoft, Nvidia, or even SoftBank. This strategy isn’t perfect because those companies are so big that their investment in OpenAI won’t move the needle much, even if the start-up is wildly successful from here.

As a result, investors looking to get involved directly may have no choice but to wait.