According to sources close to the negotiations, the demand to “get a piece” of OpenAI is extraordinary.
What’s truly mind-boggling is that OpenAI won’t offer stock to investors participating in its investment round.
OpenAI is spending money at a rapid rate, even exceeding its earnings. Microsoft’s multi-million dollar investment in 2023 was crucial for the company’s growth and model improvements.
However, OpenAI is now seeking additional funding through a significant investment round. Rumors suggest that it aims to raise $6.5 billion, but there’s speculation that the tech startup could potentially raise even more.
On Thursday, Bloomberg reported that OpenAI’s funding round is close to completion. Additionally, the venture capital fund Thrive Capital is expected to lead the round with an investment of $1.25 billion.
What’s surprising about this is that there seems to be an “oversubscription” of investors, meaning that the companies participating were hoping to invest more money than OpenAI was willing to accept.
According to an unnamed source cited by Bloomberg, OpenAI could have received several billion dollars more with the oversubscription. Some investors were unable to participate in the round, but Microsoft, Nvidia, and even Apple are putting up cash.
Invest First, and Then You Might Get Part of the Profits
It seems likely that OpenAI will officially confirm the upcoming investment round soon. If this happens, the company’s valuation, currently around $86 billion, could increase to around $150 billion.
This would place OpenAI in the same league as companies like Uber or The Walt Disney Company. However, there’s an interesting twist here. Typically, investors receive equity in exchange for their investment, but it’s unclear if this will be the case in the upcoming round.
The Information recently reported that investors won’t receive traditional shares but instead will receive “units,” which are a type of certificate or contract promising a share of a company’s profits.
Furthermore, investors will only receive their share of profits once the company starts generating them. This unconventional investment model means that investors simply have the right to a share of future profits if and when they materialize.
This type of investment carries even more risk than usual. It brings to mind the story of George Lucas negotiating to direct Star Wars: Episode IV - A New Hope (1977).
Lucas accepted a very low salary, but in exchange, he was able to retain both the sequel and merchandising rights for Star Wars. 20th Century Fox thought it was making a good deal, but Star Wars became a cultural and commercial phenomenon, generating astronomical profits, especially from merchandising.
OpenAI’s investors are hoping to get a similar deal and banking on profits being astronomical.
Currently, OpenAI’s revenues are estimated at around $2.7 billion a year, but its expenses are so enormous that, according to The Information, it’ll lose $5 billion by 2024. It’s clear that the company’s finances aren’t the best at the moment. We’ll see how they do in the future.
Image | OpenAI | Gordon Tarpley
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