- Microsoft’s $1 billion investment in OpenAI may be one of the smartest bets in tech history.
- OpenAI has released AI bot ChatGPT and is in talks to raise $30 billion in capital.
- If ChatGPT realizes its potential, Microsoft may have future-proofed its cloud and browser business forever.
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For the past few months, it has looked like Big Tech’s bull run is coming to an end. As interest rates soar, even well-funded tech companies are retreating from risky, expensive moonshots or money-losing projects.
But a speculative bet is increasingly looking like excellent value for money.
In 2019, Microsoft invested $1 billion in buoyant artificial intelligence research firm OpenAI, co-founded by Y Combinator’s Sam Altman, Elon Musk, and a group of others just over seven years ago. Financial details of the deal weren’t disclosed at the time, but MIT Tech Review reported in 2020 that the $1 billion was split between cash and credit for Azure, Microsoft’s cloud business. Insider has reached out to both companies for comment.
In November, OpenAI released an easy-to-use bot, ChatGPT, based on its GPT 3.5 language model trained on Azure. Engineers, academics, entrepreneurs, non-techies, and investors were nearly universal in their hype and praise as ChatGPT proved (up to a point) to be frighteningly intelligent. Even when buggy, ChatGPT is so smart that Google considers the chatbot “Code Red” for its search business.
Now, OpenAI is reportedly in talks to raise more capital at a valuation of nearly $30 billion – up from a current valuation of $20 billion – and is reportedly in talks with the VC led by Peter Thiel -Company Founders Fund. The valuation would be cemented by a takeover bid with the sale of existing shares to investors.
ROI aside, Microsoft’s deal only looks smarter as more details emerge.
The Information reported that the company could integrate ChatGPT with Bing, its struggling Google competitor. As Insider’s Emilia David writes, this is the first real threat to Google’s search hegemony in two decades.
ChatGPT could fuel Bing and Azure growth
Gil Luria, head of research at DA Davidson, an investment bank, wrote in a note Wednesday that “Microsoft’s “investment in OpenAI as a source of upside” deserves a premium valuation relative to the market.”
“We believe Microsoft’s investment in OpenAI will result in a significant, underappreciated benefit,” Luria wrote. He added that “the unprecedented activity” in ChatGPT “translated into incremental volumes for Azure.”
According to Luria, there are estimates of annual spend on OpenAI ranging from $250 million to $1 billion, “much of which is likely to be spent on Azure.”
Even with the Azure credit bung, OpenAI will eventually have to start spending hard money on Microsoft’s infrastructure, assuming the tech giant has negotiated the exclusivity — ChatGPT has already surpassed 1 million users, according to Altman.
OpenAI itself expects sales of $1 billion by 2024, according to Portal. DA Davidson expects these numbers to increase significantly later this year with the launch of OpenAI’s GPT 4, its next-generation AI model.
Bing also has room to grow.
Luria estimates that with $120 billion in annual run-rate revenue, Google search accounts for most of Google’s $1.1 trillion value, while Bing accounts for around $11 billion Run rate revenue accounts for “at most” 5% of Microsoft’s revenue and value.
“Longer term, we believe that integrating ChatGPT capabilities into Bing could provide a once-in-a-decade opportunity for Microsoft to dethrone Google’s search dominance,” he wrote.
Investors may be excited for speculative technology, but AI seems resilient
There is speculation that Microsoft might try to buy OpenAI. But an investment rather than a buyout gives it flexibility and room to experiment.
By contrast, Google bought London-based DeepMind in 2014, losing most of its money on the acquisition because it’s expensive to own and run a private research school. DeepMind spends about half a billion dollars annually on personnel costs alone.
And while investors are generally bulling on technology, the artificial intelligence space remains resilient.
Figures from data firm Pitchbook suggest that VC investment in AI will hit $1.37 billion across 78 deals in 2022, nearly equal to the entire investment over the past five years. Other sectors, on the other hand, recorded declines.
That suggests that investors will still be looking to dig into the hottest AI companies and solidify the value of Microsoft’s deal.
“Near-term challenges in financial markets could lead to improved business conditions for investors, which could ultimately lead to higher returns going forward,” Nalin Patel, senior analyst at Pitchbook’s EMEA private capital, told Insider. “As such, investors will be interested in deploying capital in companies operating in emerging areas with strong long-term growth potential, such as OpenAI.”
In a research note, Brendan Burke, senior analyst at Pitchbook, said that in 2023, AI startups will “stand out” by applying something known as imitation learning to baseline AI models — a means of building general AI models for the practice performing specific tasks.
In particular, the excitement of imitation learning stems from the potential to “produce commercial business models,” especially when “embedded in foundational models like OpenAI’s forthcoming GPT-4.”
OpenAI has made imitation learning a key area of interest after publishing a paper in June 2022 about a neural network trained to play Minecraft after watching 70,000 hours of videos online.
The ultimate growth and profitability of OpenAI is not a bull’s eye. There have been several “AI winters” in which interest in research and funding has waned. And slow advances in some areas — like self-driving cars — have fueled skepticism about AI’s work in the wild.
And Burke noted that AI capabilities like imitation learning “remain unproven in a commercial context and may suffer from a lack of high-quality data to complete user tasks.” Ethicists also worry about how black-box AI could be misused.
Still, thanks to ChatGPT and the popularity of OpenAI’s DALL-E generative image model, 2022 felt like a genius-out-of-the-bottle moment.
Microsoft might find it future-proof at just $1 billion.