Raising the stakes

Nine months ago OpenAI was valued at $70bn.^{2The Boston Globe, via The New York TimesOpenAI completes deal that values company at $157 billion2 Oct 2024} On 2 October the maker of ChatGPT said it had raised $6.6bn at a valuation of $157bn, one of the largest private investments ever made, and a cheque written for a company that expects to lose money.^{1Gulf News, via BloombergOpenAI raises $6.6 billion in funding at $157 billion valuation2 Oct 2024,2The Boston Globe, via The New York TimesOpenAI completes deal that values company at $157 billion2 Oct 2024} Thrive Capital, the firm headed by Josh Kushner, led it. Microsoft, which had already put in $13bn, took part again; Nvidia, SoftBank, Khosla Ventures and Abu Dhabi’s MGX joined in.^{1Gulf News, via BloombergOpenAI raises $6.6 billion in funding at $157 billion valuation2 Oct 2024,3Crunchbase NewsOpenAI raises billions led by Thrive2 Oct 2024}

The arithmetic is brave. OpenAI expects sales of about $3.7bn this year and a loss of roughly $5bn.^{2The Boston Globe, via The New York TimesOpenAI completes deal that values company at $157 billion2 Oct 2024} At $157bn, investors are paying about 42 times this year’s sales for a firm that spends more than $2 for every dollar it takes in. Even in a sector that treats the price-to-sales ratio as a rumour, this is notable.

There is a story behind the number, and it is a good one. ChatGPT has about 250m weekly users and 11m paying subscribers.^{1Gulf News, via BloombergOpenAI raises $6.6 billion in funding at $157 billion valuation2 Oct 2024} The workforce has grown to about 1,700 after adding more than 1,000 people in nine months.^{2The Boston Globe, via The New York TimesOpenAI completes deal that values company at $157 billion2 Oct 2024} What the money buys matters more than the user count: computing capacity. Training the next generation of models is dear, and the bills arrive before the revenue does.

We think the price is defensible and the structure is not. Capital at this scale is a competitive weapon, and OpenAI is spending it faster than anyone. A company that can afford to lose $5bn a year can afford to wait for rivals to run out of patience. That is good news for customers while it lasts, and a reason for antitrust enforcers to keep an eye on the longer term, since a market in which only three or four firms can afford to compete is not a market that stays cheap.

The odd feature is the contract. OpenAI began life as a non-profit, and its board still sits on top of the commercial business. Investors have noticed. Under the terms of the round, according to documents reviewed by the New York Times, OpenAI has two years to become a for-profit business, or the funding converts into debt.^{2The Boston Globe, via The New York TimesOpenAI completes deal that values company at $157 billion2 Oct 2024} The shift “could pose legal hurdles”, Bloomberg notes, and the company is also discussing an equity stake for its chief executive, Sam Altman, a notion that sits awkwardly with the origin story of a charity-minded lab.^{1Gulf News, via BloombergOpenAI raises $6.6 billion in funding at $157 billion valuation2 Oct 2024} Apple, which had been in talks to invest, stayed out.^{1Gulf News, via BloombergOpenAI raises $6.6 billion in funding at $157 billion valuation2 Oct 2024,2The Boston Globe, via The New York TimesOpenAI completes deal that values company at $157 billion2 Oct 2024}

The best defence of the round is that investors know what they are doing. A fund that pays $157bn for a loss-making firm is betting that revenue will grow fast enough to make the loss a rounding error. If it does, today’s price will look cheap. Venture capitalists are not charities, and they have written themselves a fallback.

That is the right way to settle the argument. Investors should hold OpenAI to the standard of an ordinary company: accountable to owners, disciplined by competitors and free to fail. They have, in effect, told the lab to choose between being a charity and being a business. It took a $6.6bn invoice to put the question.