OpenAI is now worth more than 87% of S&P 500 companies. It faces a tough test ahead.

By Therese Poletti

OpenAI just became one of the highest-valued privately held companies with its latest funding round, but it has a lot to live up to, amid ever- increasing competition.

On Wednesday, the creator of ChatGPT said in a blog post that it raised $6.6 billion in new funding at a whopping valuation of $157 billion to "accelerate progress toward its mission." OpenAI did not specify its investors, but the Wall Street Journal reported that the round was led by venture-capital firm Thrive Capital, current investors such as Microsoft Corp. (MSFT) and new investors including Softbank Group Corp. (JP:9984) and chip giant Nvidia Corp. (NVDA).

At that valuation, OpenAI is worth more than 87% of the S&P 500 SPX companies. It makes OpenAI among the highest-valued private companies in the world, along with SpaceX, which is currently valued at $201 billion, and TikTok. At the start of last year, according to Forge Global's secondary-market trading data, OpenAI was valued at $29 billion. Before this round, OpenAI was valued at $110 billion, according to Forge.

According to the New York Times, which reviewed copies of the financial documents OpenAI was sharing with investors, the AI company has forecast that revenue in 2025 will soar to $11.6 billion, up from a projected $3.7 billion this year. But it is also projecting to lose $5 billion this year, after accounting for the cost of running its services, salaries and other expenses. The Times also noted that the projected loss does not include the cost of equity compensation for its employees.

In an unusual move, OpenAI reportedly only shared its financial documents with investors willing to put in a minimum of $250 million. One venture capitalist said it was likely a way of pre-qualifying prospective investors.

"Given the amount of money they are raising/consuming, they need big check writers and can't really absorb a large number of small investors," said Bob Ackerman, managing director and founder of AllegisCyber Capital, in an email. "No one is going to make a $250 million commitment without due diligence, so I would assume there is a DD [due diligence] out."

Reuters reported late last week that lead investor Thrive Capital is getting an exclusive option to invest another $1 billion in OpenAI in the next year at the same valuation, if the company hits its revenue targets.

Investing in OpenAI is basically an investment in the future, said Duncan Davidson, a general partner at Bullpen Capital. "I think the class of investors does not really care, since this isn't a financial deal but a huge bet on the future," he said. "Plus, many of them (sovereign wealth funds) would like to build AI capability in their regions and monetize that way."

Even so, OpenAI is not a totally stable company. It recently lost Mira Murati, a co-founder and its chief technology officer, amid a slew of other departures, and the company is also reportedly transitioning into becoming a for-profit one. It was founded as a non-profit, with an altruistic focus on developing AI for the good of humanity. Many in Silicon Valley and beyond have speculated the rash of executive and developer departures - estimated at about 20 in the past year, according to the Journal - was due to fears that the company is losing its original founding principle and non-profit status.

"All the signs point to that they have [artificial general intelligence] and those people don't feel right about the way the company is going to go," said David Borish, an AI strategist. In its blog post, OpenAI said that its mission is "to ensure that artificial general intelligence benefits all of humanity." AGI refers to a type of AI that matches or surpasses human intelligence.

At the same time, OpenAI is not alone with ChatGPT and other AI technologies it is developing. Anthropic, Alphabet Inc.'s (GOOG) (GOOGL) Google and Meta Platforms (META) are developing increasingly competitive products and large language models. Plus, developers around the world are making use of a variety of open-source LLMs to work on rival products.

OpenAI's investors, though, "have seen something we haven't seen," Borish said.

OpenAI has set very high goals, which it must meet, especially as it continues to spend so much money. It may have a perceived first-mover advantage among its rivals in the arena of generative AI, but many on Wall Street are not yet convinced that AI will have enough return on investment to justify the recent spending boom.

-Therese Poletti

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10-03-24 0500ET

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