Why OpenAI Needed That Huge Funding Round, Which Won't Be Its Last

OpenAI raised a stupendous amount of new funding at a staggering valuation. But it is projected to lose $5 billion this year, with no prospect of profitability in the foreseeable future and so it is reasonable to expect such funding demands will continue.

The company also insisted that investors pledge not to invest in competitors, suggesting it realizes competition is getting tougher, skepticism is growing and that it has a shrinking window to demonstrate it is what it's investors believe it to be. It's investors can afford the risk. The question is how much longer they will be willing to to do so, JL

Andrew Sorkin reports in the New York Times:

OpenAI closed its mega fund-raising round, valuing it at $157 billion, double its valuation nine months ago. That gives the unprofitable start-up billions to keep up with rivals in the AI race. But it illustrates how much tougher competition is getting. OpenAI is expected to lose $5 billion this year, and keeping up with bigger rivals including Google and Amazon will force it to keep raising new capital. Investors had to pledge not to invest in major competitors, including Anthropic; Safe Superintelligence, co-founded by OpenAI’s former chief scientist; and xAI, run by Elon Musk. That OpenAI was able to draw prominent investors shows its power, but suggests the company is worried about growing competition.

OpenAI has finally closed its mega fund-raising round, valuing the ChatGPT creator at a staggering $157 billion — nearly double its valuation from just nine months ago.

That gives the unprofitable start-up billions more to keep up with rivals in the artificial intelligence race. But the round also illustrates how much tougher that competition is getting.

Who’s in: OpenAI raised $6.6 billion from investors led by Thrive Capital, Josh Kushner’s venture capital firm. The round also included Microsoft, Nvidia, SoftBank’s Vision Fund, Fidelity, the Emirati investment firm MGX, Tiger Global Management, Coatue Management, Khosla Ventures, Altimeter Capital and Cathie Wood’s ARK Venture Fund.

The round underscores a widespread belief in OpenAI’s dominance. Potential investors were reportedly asked to commit at least $250 million just to see the company’s financial documents. Several went beyond that, with SoftBank investing about $500 million and Tiger about $350 million.

Thrive put in $750 million of its own money and $550 million from other investors through a special purpose vehicle, which makes OpenAI one of its single-biggest investments. The firm’s thesis, DealBook hears: OpenAI leads the sector on several fronts, including its products, training data and engineering talent, and will grow more valuable as A.I. is on the path to become a trillion-dollar industry.

But OpenAI also faces steep challenges. The start-up is expected to lose $5 billion this year, and keeping up with bigger rivals including Google and Amazon will force it to keep raising new capital.

That’s pushing OpenAI to abandon some of its long-held precepts. Terms of the new round give the start-up two years to convert to a for-profit business from a nonprofit organization, or the new funding will become debt.

OpenAI is also said to have made a big demand of investors. They had to pledge not to invest in certain major competitors, according to The Financial Times and The Wall Street Journal. Those companies include Anthropic, which was created by OpenAI alumni; Safe Superintelligence, which was recently co-founded by OpenAI’s former chief scientist; and xAI, which is run by Elon Musk, an OpenAI co-founder.

The stipulation most likely ruled out many potential investors, given how widely venture firms are spreading their A.I. bets. That OpenAI was still able to draw prominent investors for its round shows its power in the industry. But it also suggests that the company is worried about growing competition.