The Beginning of the End

OpenAI Raises $6.6 Billion

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AI For All
October 04, 2024

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Hello readers,

Welcome to another edition of the AI For All newsletter! OpenAI has managed to raise $6.6 billion from investors at a $157 billion valuation. This may seem like a triumph, but there are conditions, and the road ahead is a tumultuous one. Let’s dive in!

The Beginning of the End

OpenAI has successfully raised $6.6 billion from investors at a $157 billion post-money valuation and also established a $4 billion revolving credit facility with JPMorgan Chase, Goldman Sachs, Morgan Stanley, and others, giving them access to $10 billion in liquidity. That’s right. A grossly unprofitable company with a half-working product that will only get more expensive to serve managed to raise billions from hype alone. However, this raise comes with some conditions.

Funding will convert into debt at a 9% interest rate if OpenAI does not become a for-profit within two years. The $4 billion revolving credit facility provides access to capital, but it’s still more debt. If OpenAI draws on it, they will need to repay it with interest. Since OpenAI loses billions of dollars a year, they actually need to raise even more money again and soon. OpenAI had some conditions of its own. Investors had to fork over at least $250 million and were asked not to invest in competitors.

Apple wisely chose not to invest in this round while SoftBank’s Masayoshi Son thought it prudent to invest $500 million. Son famously lost billions investing in WeWork. All this bailing out investment means the pressure is on for OpenAI to become a real company. OpenAI is attempting to undergo a metamorphosis. Like Google before them, they are going from engineering-led to management class ruled — a “real” company.

This is one explanation for all the departures. Add Tim Brooks to the list, co-lead of OpenAI’s Sora video generator, which is yet to be released. We should expect the price of ChatGPT to increase and more half-baked products. Apparently, OpenAI employees felt that o1 had been released prematurely. Ever determined to fail in OpenAI’s footsteps is Google, who are also planning a “reasoning” model.

The future of OpenAI hinges on an entirely hypothetical breakthrough, one that has nothing to do with their current product. It’s not even clear if OpenAI can raise the money it needs after they burn their $6.6 billion dollars, some of which may just be in the form of cloud credits from investor Microsoft. This may be the beginning of the end.

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📖 What We’re Reading

“GenAI is often seen as a miracle engine that promises to put early adopters on the track to greater efficiencies, lower costs, and quick wins. But most companies find that after a year of investing in endeavors that have underdelivered compared with expected results, the effect seems more like a collective spinning of wheels. The risk is that disappointed expectations can lead to disillusionment and lost momentum, when there are real benefits to be had.”

Source: Boston Consulting Group

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