OpenAI – Hot Mess pt. III

The hot mess may be tidied up.

• OpenAI’s corporate structure has been unfit for purpose for over a year now but finally, it looks as if investors paying a pre-money valuation of $150bn are forcing OpenAI to become a proper company rather than a science project with a commercial attachment.
• OpenAI as it exists today is a powder keg that has almost killed the company once and because the structure was fudged rather than fixed, it could blow up again at any moment.
• OpenAI was set up as a non-profit to develop artificial general intelligence (AGI) which is the point at which machines become as intelligent as humans or more so.
• As a non-profit, OpenAI would ensure that this critical technology would not be monopolised by a single company but would instead benefit all of humanity.
• While the company was a bunch of scientists tinkering with a problem that has eluded humanity for years and making little progress, this was not a problem.
• However, along the way on this journey, the company created something that does not solve the AGI problem but did cost a fortune to create and has very great commercial potential.
• When OpenAI took $1bn from Microsoft in 2020 which it needed to pay for the immense amount of compute that was required to develop its large language models (LLM), the seed was sown for potentially fatal internal conflict.
• The problem was (and remains today) that the company is governed as a non-profit but with more and more of the company being owned by commercial investors needing to see returns the pressure to make money continues to increase,
• This was compounded in 2023 when OpenAI took another $10bn from Microsoft and with the current round at $150bn pre-money, the pressure looks like it is becoming unbearable.
• Microsoft is a commercial enterprise and does not invest $11bn with no hope of earning a return as it has a fiduciary duty to its shareholders to make them money.
• This is why I suspect that Sam Altman discussed this at the all-hands meeting held at OpenAI last week as this condition of the round was almost certainly going to leak.
• While he would not be drawn on specifics, it is clear that the company will move away from its non-profit roots and hopefully become a proper for-profit company.
• This would be very good news for everyone concerned as Microsoft is embedding OpenAI technology in all of its revenue-generating products and a further implosion could cause Microsoft real problems.
• While this will greatly reduce the risk attached to OpenAI, it does not suddenly mean that $150bn pre-money represents good value for investors.
• For example, even if OpenAI generates $5bn in revenues next year, it is unlikely to make any money which is a real problem for a company at this scale.
• It raises questions about the financial returns that can be made from generative AI as the costs seem to be going up as fast, if not faster than revenues.
• Furthermore, the idea of paying 30x revenues for a company that doesn’t make money and is not a tiny start-up just beginning to make revenue makes no sense to me.
• However, the money is almost certain to generate more demand for Nvidia which remains the safest way to play the generative AI craze directly.
• However, I continue to prefer the adjacencies of inference at the edge (Qualcomm) and nuclear power as their valuations are far more reasonable and both will still perform well even if generative AI fails to live up to expectations.