Microsoft’s OpenAI investment is the smartest $1 billion ever spent

  • Microsoft’s $1 billion investment in OpenAI may be one of the smartest bets in tech history.
  • OpenAI has launched its AI bot ChatGPT and is in talks to raise $30 billion in capital.
  • If ChatGPT lives up to its potential, Microsoft could future-proof the cloud and browser business forever.

Over the past few months, it looked like Big Tech’s bull run was coming to an end. As interest rates rise, even cash-rich tech companies are backing away 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 OpenAI, the high-profile AI research startup co-founded more than seven years ago by Y Combinator alum Sam Altman, Elon Musk, and a group of others. Financial details of the deal were not disclosed at the time, but MIT Tech Review reported in 2020 that $1 billion was split between cash and loans for Azure, Microsoft’s cloud business. Insider has reached out to both firms for comment.

In November, OpenAI released a user-friendly bot called ChatGPT based on the GPT-3.5 language model trained on Azure. Engineers, academics, entrepreneurs, non-techies and investors alike were almost universal in their hype and praise as ChatGPT proved to be terrifyingly smart (up to a point). Even with its flaws, ChatGPT is smart enough that Google sees the chatbot as a “code red” for its search business.

OpenAI is reportedly in talks to raise more capital at a valuation closer to $30 billion, up from the current $20 billion, and is reportedly in discussions with Founders Fund, a VC firm run by Peter Thiel. The valuation will be confirmed by a tender offer, which involves the sale of existing shares to investors.

ROI aside, Microsoft’s deal looks smarter as more details emerge.

According to reports, the company may integrate ChatGPT into Google’s strongest competitor, Bing. As Insider’s Emilia David writes, this is the first real threat to Google’s search hegemony in two decades.

ChatGPT could drive growth for Bing and Azure

“Microsoft deserves a premium relative to the market for its investment in OpenAI,” Gil Luria, director of research at investment bank DA Davidson, said in a note on Wednesday.

“We believe Microsoft’s investment in OpenAI will translate into significant undervalued upside,” Luria said. He added that “unprecedented activity” at ChatGPT is “translating into increased volumes for Azure.”

Luria said there are estimates of $250 million to $1 billion in annual spending on OpenAI, “most likely being spent on Azure.”

Even with Azure credit backing, OpenAI will eventually have to start spending hard money on Microsoft’s infrastructure with exclusivity negotiated by the tech giant — ChatGPT has already surpassed 1 million users, according to Altman.

According to Reuters, OpenAI itself expects $1 billion in revenue by 2024. DA Davidson expects these levels to increase significantly with the introduction of OpenAI’s next-generation AI model, GPT 4, later this year.

Bing also has room to grow.

Luria estimates that Google Search, with annual run-rate revenue of $120 billion, accounts for the bulk of Google’s $1.1 trillion valuation, while Bing accounts for “at most” 5% of Microsoft’s revenue and value, with run-rate revenue of about $11 billion. does.

“In the longer term, we believe the inclusion of ChatGPT capabilities in Bing could give Microsoft the opportunity to chip away at Google’s once-in-a-decade search dominance,” he said.

Investors are eager for speculative tech, but AI looks resilient

There is speculation that Microsoft might try to buy OpenAI. But investing instead of buying gives him room for flexibility and experimentation.

Google, by contrast, bought London-based DeepMind in 2014 and saw the acquisition lose money because it was expensive to own and run a private research faculty. DeepMind spends nearly half a billion dollars annually on personnel costs alone.

While investors are generally tech-savvy, the field of artificial intelligence remains resilient.

Figures from data firm Pitchbook show that VC investment in AI will reach $1.37 billion across 78 deals in 2022, representing nearly the total invested in the past five years. On the contrary, a decrease was observed in other sectors.

That suggests investors will still be looking to get into the hottest AI companies, bolstering the value of Microsoft’s deal.

“The near-term challenges facing financial markets could result in improved contract terms for investors, which could ultimately lead to higher returns going forward,” said Nalin Patel, lead analyst for EMEA private equity at Pitchbook. “Investors will therefore be motivated to invest 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 AI startups in 2023 will “differentiate” by applying something known as imitation learning to their core AI models — a means of training general AI models to perform specific tasks.

In particular, the excitement of imitation learning, he noted, comes from “the potential to produce commercial business models,” especially “if they are incorporated into foundational models such as OpenAI’s upcoming GPT-4.”

OpenAI made imitation learning a major area of ​​interest in June 2022, publishing a paper on a neural network trained to play Minecraft after watching 70,000 hours of online video.

OpenAI’s recent growth and profitability is no slam dunk. There have been several “AI winters” that have seen research interest and funding wane. Slow progress in some areas, such as self-driving cars, has raised doubts about how artificial intelligence will work in the wild.

And Burke noted that AI features like imitation learning “remain unproven in a commercial context and may suffer from a lack of quality data on user task completion.” Ethicists are also concerned about how black-box AI could be misused.

Still, 2022 felt like a genie out of a bottle thanks to the popularity of ChatGPT and OpenAI’s generative image model DALL-E.

Microsoft can future-proof itself with just $1 billion.

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