Global Courant 2023-04-11 19:38:28
The Microsoft campus in Mountain View, California, on July 22, 2021. David Paul Morris / Bloomberg via Getty Images file
When Microsoft originally invested $1 billion in OpenAI in 2019, the transaction drew no more attention than a typical corporate venture round. The startup industry exploded and artificial intelligence, along with electric cars, smart logistics and aerospace, was one of many industries that delivered mega valuations.
Three years later, the market has changed radically.
After the collapse of public market multiples for high-growth, money-losing tech companies, investment in startups has plummeted. The exception is artificial intelligence, more specifically generative AI, which refers to systems that automatically generate text, visual, and audio responses.
No private company is more popular than OpenAI. In November, the San Francisco-based company launched ChatGPT, a chatbot that quickly gained popularity for its ability to provide human answers to users’ questions on virtually any topic.
Microsoft’s once unnoticed investment is suddenly a hot topic in venture capital and among public shareholders trying to figure out what it means for the future value of their shares. Microsoft’s total investment in OpenAI is said to be $13 billion, valued at more than $29 billion to the company.
That’s because Microsoft isn’t just throwing money at OpenAI. It’s also the arms dealer, being the exclusive source of computing power for OpenAI’s research, products, and developer programming interfaces. Startups and large companies, such as Microsoft, are struggling to connect their products to OpenAI, resulting in massive workloads running on Microsoft’s cloud servers.
The technology will be integrated into Microsoft’s Bing search engine, sales and marketing applications, GitHub coding tools, the Microsoft 365 productivity suite, and the Azure cloud. That could all add up to more than $30 billion in additional annual revenue for Microsoft, of which Azure accounts for about half, according to Michael Turrin, an analyst at Wells Fargo.
What does this mean for Microsoft’s investment and overall deal?
“It’s so good that investors ask me how they did it, or why OpenAI would do this,” Turrin said in an interview.
The financial consequences, on the other hand, are far from clear.
Bragging rights
OpenAI was founded in 2015 as a non-profit organization. The structure changed in 2019, when two key executives announced in a blog post the creation of a “maximum profit” company called OpenAI LP. The system in place prevents the startup’s first investors from generating more than 100 times their money, while later investors, such as Microsoft, receive lower returns.
When Microsoft’s investment is repaid, it will get a portion of OpenAI LP’s revenue up to the agreed maximum, with the rest going to the nonprofit, an OpenAI representative said. A Microsoft representative declined to comment.
In a 2019 Reddit comment, Greg Brockman, a co-founder of OpenAI and one of the blog post’s writers, stated that the system “feels proportional to what they could earn by investing in a pretty successful startup (but less than what they would get by investing in the most successful startups of all time!).”
It’s an unusual paradigm in Silicon Valley, where the venture industry has always prioritized increasing returns. That doesn’t make sense to Elon Musk, one of OpenAI’s founders and early backers, either. On many occasions this year, Musk has expressed concerns about OpenAI’s unorthodox structure and its implications for AI, especially given Microsoft’s level of ownership.
″OpenAI was created as an open source (that’s why I called it ‘Open’ AI), non-profit company to counterbalance Google, but now it has become a closed source, maximum profit company effectively controlled by Microsoft”, Musk tweeted in February. “Not at all what I meant.”
OpenAI was created as an open source (that’s why I called it “Open” AI), non-profit company to counterbalance Google, but now it has become a closed source, maximum profit company effectively controlled by Microsoft.
Not at all what I meant.
— Elon Musk (@elonmusk) February 17, 2023
On Reddit, Brockman stated that if OpenAI is successful, it will create “orders of magnitude more value than any company has done to date.” Microsoft would benefit as an OpenAI investor.
Investment aside, Microsoft’s reliance on OpenAI has the potential to help it radically turn around its fortunes in AI, where it openly struggled and failed to develop a major business on its own. Microsoft removed the Clippy Word helper, Cortana from the Windows taskbar, and the Tay Twitter chatbot.
Unlike advertising or security, Microsoft has not disclosed the size of its AI business, while CEO Satya Nadella stated in October that revenue from its Azure Machine Learning service has quadrupled in four consecutive quarters.
At the very least, Nadella’s involvement with OpenAI has earned him bragging rights. Here’s what he said in December, a month after ChatGPT was released, at Microsoft’s annual shareholder meeting:
“When I think about Azure, one of the things we’ve done, in fact even in the context of ChatGPT, which is one of the most popular AI applications today, guess what? It’s all trained on the Azure supercomputer.”
Microsoft held a press event at its headquarters in Redmond, Washington, in February to showcase new AI-driven improvements to its Bing search engine and Edge browser. One of the prominent speakers was Altman.
Since then, the Bing chatbot has had several highly publicized and disturbing exchanges with users, and has had a number of misrepresentations upon launch. Fortunately for Microsoft, the launch of Google’s competitor Bard AI service was unimpressive, with staff describing it as “rushed” and “failed”.
Despite the early setbacks, there is interest across the technology sector in new technologies based on large language models, or LLMs.
The basis of OpenAI’s bot is an algorithm called GPT-4, which has learned to write natural-sounding language after being trained on large amounts of web content. According to an OpenAI spokesperson, Microsoft has an exclusive license to GPT-4 and all other OpenAI models.
There are several LLM programs available.
Google said last month that it has granted select developers early access to an LLM called PaLM.
AI21 Labs, Aleph Alpha, and Cohere are among the startups offering their own LLMs, as is Google-backed Anthropic, which Google has chosen as its “preferred” cloud provider. Anthrop co-founder Dario Amodei, who was previously vice president of research at OpenAI, has highlighted concerns about AI’s unfettered power, as have Altman and Musk.
Anthropic filed for public benefit in 2021 in Delaware, indicating its desire to make a good impact on society while making a profit.
“We were and are focused on developing innovative structures to provide incentives for the safe development and deployment of AI systems and will have more to say about this in the future,” an Anthropic spokesperson told in an email. CNBC.
One thing is clear across the industry: It’s still early days.
Quinn Slack, CEO of code search firm Sourcegraph, said he has seen no evidence that Microsoft’s OpenAI agreement has given it a significant advantage, despite OpenAI being named the top LLM vendor.
“I don’t think people should look at Microsoft and say they’ve locked OpenAI completely and OpenAI does what they want,” Slack said. “I really believe that the people there are motivated to build great technology and use it as widely as possible. They see Microsoft as a great customer, but not as someone in control. That’s good and I hope it stays that way.”
OpenAI has many skeptics. Late last month, the nonprofit Center for Artificial Intelligence and Digital Policy called on the Federal Trade Commission to prevent OpenAI from making new commercial releases of GPT-4, describing the technology as “biased, misleading and a risk to privacy and public safety”.
With its intimate connection to OpenAI, Microsoft – which has no seat on the OpenAI board – would be the obvious buyer. Still, such a transaction would almost certainly be subject to regulatory scrutiny due to concerns about AI and Microsoft restricting competition. Microsoft could evade Hart-Scott-Rodino investigations from US antitrust regulators by being an investor and not owning OpenAI.
“I’ve experienced it. It’s painful,” said David Zilberman, 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 stats, OpenAI is on track to generate $200 million in revenue this year, up 150% from 2022, and $1 billion in 2024, up 400%.
“When you raise against a $30 billion valuation, it’s kind of like there’s no going back at that point,” Raney said. You say, “Our plan is to become a large, independent, standalone company.”
According to an OpenAI spokeswoman, there are no intentions for the company to go public or be bought.