Microsoft’s future with ChatGPT creator OpenAI

Microsoft is firmly in the friend zone with OpenAI, the ChatGPT creator that’s taken the tech world by storm. But, deep down, it must want to take things to the next level.

Driving the news: OpenAI soon could be valued at around $29 billion via a secondary stock sale co-led by venture capital firms Founders Fund and Thrive Capital, as first reported by the WSJ and confirmed by Axios.

  • This would be the second such tender by OpenAI, which last year did one at a $20 billion valuation with buyers like Andreessen Horowitz, Bedrock Capital, Sequoia Capital and Tiger Global.
  • OpenAI’s only announced primary fundraise since (kinda/sorta) converting from a nonprofit to a for-profit was in 2019 when it secured $1 billion from Microsoft (much of which was in the form of Azure credits). Most everyone seems to think it raised a subsequent round, but the company has steadfastly declined to comment.

Microsoft has every reason to want to buy OpenAI, and fast since the value just continues to climb.

  • The tech giant’s mission is to increase productivity, and OpenAI is at the forefront of the next wave of productivity gains (helping generate everything from text to code to images).
  • Unlike rivals Google and Facebook, Microsoft doesn’t have this sort of business in-house. But it does have over $100 billion in cash on hand, plus a stock whose decline over the past year has been relatively light.

Microsoft also has reasons to not want to buy OpenAI, at least not right now.

  • It’s already in the midst of what might be a lengthy antitrust fight over Activision Blizzard, which would almost certainly prohibit another big money acquisition effort.
  • OpenAI arguably would grow slower under Microsoft’s umbrella, due to its entrenched ethics bureaucracy. By keeping it independent, Microsoft gets to benefit from OpenAI — including Bing integration — without owning responsibility for its thornier aspects.

The bigger issue: Even if Microsoft did decide the benefits outweighed the risks, there’s a giant hurdle in that OpenAI has no intention of selling. Not now, not ever.

  • Before continuing, let’s stipulate to the maxim that companies are bought, not sold.
  • But OpenAI has a unique structure, whereby investment retuns (for outsiders and employees) are capped. Any excess is returned to a nonprofit organization that technically sits on top of the for-profit. Moreover, only a minority of those sitting on the nonprofit’s board are allowed to have financial stakes, thus further limiting the incentive to support a sale.

The bottom line: Microsoft and OpenAI are in a mutually beneficial relationship that will only deepen over time. At some point, there are going to be whispers.

Posted January 6, 2023 by & filed under News.