OpenAI asks for money and demands fealty

The generative AI (GenAI) pioneer has just raised a whopping $6.6 billion, a capital increase that now values the company at $157 billion.

That represents almost a doubling since February, when shares sold by employees resulted in a valuation of $80 billion. In April last year, another share sale conducted by OpenAI valued the company at just shy of $30 billion.

This meteoric rise, going hand-in-hand with the seemingly insatiable appetite among investors to get in on the action, seems to have emboldened OpenAI, judging by the air of entitlement surrounding this latest funding round.

According to multiple press reports, OpenAI asked backers not to invest in rival AI companies like Anthropic and Elon Musk-backed xAI.

Sources cited by the Financial Times (paywall) said that while investors do get a look under the hood of the companies they invest in – causing potential conflicts of interest should they subsequently put money into a rival – exclusivity is rarely a requirement.

But such was the clamour to participate in OpenAI's funding round, that according to these sources, the company was able to more or less dictate the terms.

According to sources cited by the Wall Street Journal (paywall), venture capital firm Thrive Capital led the round, stumping up $1.25 billion in total. Existing backer Microsoft invested just under $1 billion. Other big names included Softbank and Nvidia, which invested $500 million and $100 million respectively.

Interestingly, Apple was said to be in talks about participating, but ultimately chose not to – even though its recently-launched Apple Intelligence AI solution has been co-developed with OpenAI.

Perhaps the iPhone maker didn't like the Ts&Cs.

In a brief statement, OpenAI noted that these days it has more than 250 million weekly users of ChatGPT, and that its newly-acquired $6.6 billion "will allow us to double down on our leadership in frontier AI research, increase compute capacity, and continue building tools that help people solve hard problems."

That's great and everything, but does that justify such a sky-high valuation?

Veteran telecoms analyst Richard Windsor doesn't think so, asserting on his Radio Free Mobile blog that investors' willingness to pledge their allegiance is yet another symptom of the AI bubble.

He noted that OpenAI's valuation of $157 billion represents $628 per user; however, none of these users have been monetised, so bring no value at all to OpenAI.

Citing figures from CNBC, Windsor said OpenAI's paying subscriber base stands at 11 million individual plus 1 million business accounts, which pay $20 per month and $30 per month respectively, generating monthly revenues of $250 million. That puts OpenAI close to meeting its projection of turning over $3.7 billion this year.

"However, the expectations are that revenues will grow to $11.6 billion next year which will require a subscriber base of 48 million – more than4x what it is today," he wrote.

"This is supposed to be achieved with no price erosion despite an increasingly bewildering number of competitors and [Meta CEO] Mark Zuckerberg's contention that everyone is already 'slashing prices' to compete with [Meta's] Llama 3 [large language model] priced at $0 per month."

Windsor also points out that OpenAI expects to make a loss of around $5 billion this year. In short, he seems more than a little doubtful that OpenAI's current valuation is fully merited.

OpenAI is also suffering from ongoing turmoil at senior management level, with the CTO and chief research officer both recently heading for the exit."

For OpenAI and its competitors, their valuations will only be able to defy gravity for so long and when the correction comes, those that have flown the highest will have the furthest to fall," warned Windsor, predicting that "OpenAI will fall the furthest and the hardest when the bubble eventually does burst."