👾 OpenAI Finances: The Current Development (Part 2)

As we can see, since its founding in 2015, OpenAI has grown from a non-profit research organization to one of the leading players in the field of artificial intelligence, which has been made possible by the hybrid form of financing. This transformation is clearly reflected in the company's current financial position.

In October 2024, OpenAI closed a major funding round that raised $6.6 billion (thereby surpassing xAI's funding round by $600 million).

This investment increased the company's valuation to an impressive $157 billion. In addition to its long-standing partner Microsoft, major investors in this round included companies such as NVIDIA and SoftBank. This capital injection underscores investors' confidence in OpenAI's technologies and their potential to significantly influence the future of AI.

Despite this major cash injection, OpenAI still faces financial challenges. For 2024, the company is forecasting an operating loss of around $5 billion, although revenues are estimated at around $3.7 billion. This loss is mainly due to the enormous operating costs, in particular the high expenditure on computing power and infrastructure required to train and operate large AI models.

To meet these financial challenges, OpenAI plans to increase the prices of some of its services. In addition, the company is aiming for a further increase in revenue in the coming years, to an estimated $11.6 billion in 2025 and, in the long term, $100 billion in 2029. These ambitious goals are to be achieved by continuously developing and commercializing AI technologies.

“The main way that OpenAI makes money today is via subscriptions to its ChatGPT Plus product. Pricing is on the flat rate of $20/month. Total sales hit $100M annualized shortly after the launch of ChatGPT’s paid tier. The other main way OpenAI makes money is via the usage-based pricing for their APIs offered to businesses building on top of models like GPT-3 and GPT-4. Pricing differs based on the size of the context window and the particular model—for example, GPT-4 with a smaller 8K context window costs $0.03 per 1K tokens for prompts and $0.06 for completions, while the less powerful gpt-3.5-turbo model optimized for chat dialogue costs just $0.002 per 1K tokens. (...) OpenAI also makes money from renting access to their DALL-E image model, Whisper audio model, and fine-tuning and embedding. Enterprise customers spending upwards of $45K/month get discount pricing.”

In light of these developments, the question arises as to whether OpenAI can still be considered a start-up. Traditionally, startups are defined as young companies with high growth potential but limited resources. However, with a valuation of $157 billion, significant partnerships with tech giants and a global presence, OpenAI has long since left this stage behind. The company now operates on a par with established tech giants and has a significant influence on the industry.

Nevertheless, OpenAI has retained the entrepreneurial spirit typical of start-ups. The company continues to focus on innovation, rapid adaptability and the development of new markets. This approach enables OpenAI to remain competitive in a rapidly developing field of technology while pursuing its original mission: the development of AI for the benefit of all humanity. Despite all this, the focus remains on strong growth and value creation.

“OpenAI’s ChatGPT continues to dominate, growing 2x this year to date to $2.9B ARR—dwarfing Anthropic's competitive chatbot Claude, which grew 5x to $120M ARR—with its competitive set more Google (incumbent at $328B TTM revenue, up 6.8% YoY) and Perplexity (insurgent at $45M ARR, up 543% year to date) than Anthropic.” 

OpenAI continues to make large losses, which are expected to increase until 2026.

“With $5B in losses for 2024, expected to rise to $14B in 2026, OpenAI continues to index heavily on growth and shows the potential for a longer runway of >100% YoY growth—particularly as its partnership with Apple Intelligence kicks in—betting that scale will win the market.”

In summary, OpenAI has left behind the traditional characteristics of a start-up company, but continues to embody the dynamism and innovative strength of such a company. The current financial situation reflects both the enormous investments and the challenges associated with developing advanced AI technologies. With a clear vision and strategic partnerships, OpenAI is well positioned to achieve its ambitious goals in the coming years, especially in a more competitive market with growing players (Anthropic, xAI, Alibaba).

OpenAI remains strongly focused on growth and although the company is still running annual losses in the billions, investors see enormous potential in the development, which is reflected, among other things, in the last financing rounds, which brought record investments. So OpenAI is still running a deficit, but is generally seen as a strong growth company that is developing in the right direction.

The For-Profit Arm: Revenues and Dependencies

“Shortly following the development of the GPT, OpenAI did two things: 1) they launched GPT-2 without disclosing the model code and weights, reneging on their original conception of full transparency, and 2) they transitioned from a non-profit model to a “capped” for-profit model to raise VC and better attract potential employees.”

As mentioned earlier, OpenAI took an important step in 2019 to secure its long-term funding while remaining true to its ethical mission: the establishment of OpenAI LP, a commercial subsidiary with a capped-profit structure. This step was a direct response to the immense costs of research and development in the field of artificial intelligence, especially when it comes to scaling models like GPT-3 and GPT-4. OpenAI had realized that the original non-profit structure was no longer sufficient to compete with tech giants like Google and Amazon, which had almost unlimited financial resources for their AI research. The challenge was to find a funding solution that would provide enough capital for the costly development of AI without compromising its ethical principles and long-term goals.

“The sky-high of training and deploying models like GPT-4 helps explain the unusual terms of Microsoft’s roughly $13B of investment in OpenAI over the last few years.  OpenAI’s hybrid corporate structure, with both a for-profit business wing and a non-profit research lab wing, determines how investors in the company will eventually be paid out. A wrinkle in the for-profit wing of the business is that profits are capped: OpenAI’s earliest investors and employees are limited to making 100x their initial investment. The combined organization is run by OpenAI’s non-profit arm.”

However, the partnership also creates certain dependencies. In the wake of the near-collapse of OpenAI in 2023, Satya Nadella saw the investments in OpenAI jeopardized and immediately offered all employees the opportunity to transfer to Microsoft to continue their AI research. In the same context, a report by Nadella was made public that showed the close ties and now certain dependency of OpenAI on Microsoft.

“Once the for-profit business arm begins to return profits, the first people to get paid out will be the very earliest investors in the company, who will get their principal paid back.  After those early investors are paid out their principal, 25% of OpenAI’s profits will go to employees and to pay early investors (until they hit their profit cap), while 75% will go to Microsoft until it recoups its $13B principal.  After Microsoft recoups its $13B, it will get 50% of all OpenAI profits until it gets to $92B (at which point they’ll hit the profit cap), while 49% will go to early investors and employees and 2% will go to OpenAI’s non-profit arm.  Once $92B in profit is generated and paid to Microsoft—along with that $13B in principal—all equity reverts back to OpenAI, along with 100% of future profits.”

The role of the non-profit parent company, which oversees the activities of OpenAI LP, remains important. It ensures that all decisions are made in line with the original mission: to develop artificial intelligence for the benefit of all humanity. This overarching control prevents commercial interests from taking over and ensures that profits are invested in research into safe and responsible AI. Transparency is a central pillar of this. OpenAI regularly publishes reports on its progress, challenges and strategic direction in order to maintain the trust of the public and the scientific community.

However, this nonprofit character, combined with excessive control, has led to significant internal tensions as OpenAI was transformed into a for-profit structure, which may have contributed to the departure of key individuals such as Ilya Sutskever and Mira Murati. Reports suggest that this restructuring, which was aimed at securing significant investment, raised concerns about the company's original non-profit mission. In particular, the shift away from security priorities and the focus on commercial goals may have influenced these executives' decision to leave.

The partnership between Microsoft and OpenAI is also facing a possible realignment. Currently, there is a clause that prevents Microsoft from accessing OpenAI's most advanced models once they have reached the AGI level. However, OpenAI is considering removing this clause to secure further billions of dollars in investment from Microsoft and to continue the collaboration even after AGI has been achieved. These deliberations reflect the dynamic development of the relationship between the two companies as they work together to achieve AGI.

Coming Soon: Part III of OpenAI’s Ethical Balancing Act

As is well known, Elon Musk has repeatedly brought legal action against OpenAI and its conversion to a for-profit structure. However, OpenAI vehemently denies these allegations and says that Musk himself was the one who demanded the economic conversion! Who is right, and what are the implications of the legal dispute? We take a detailed look at the most recently published correspondence and provide an initial assessment!

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