OpenAI Inc

Idea

OpenAI was established with the idea of advancing digital intelligence with an emphasis on the broader good of humanity. It aims to be at the forefront of artificial intelligence (AI) research, pushing boundaries and setting benchmarks for excellence. OpenAI's work ranges from machine learning algorithms to natural language processing models like GPT (Generative Pre-trained Transformer) series. Besides basic AI research, the organization is also involved in software development and has commercial products like the OpenAI API, which powers various applications of AI in the real world.

Mission statement

OpenAI's mission is to ensure that artificial general intelligence (AGI) benefits all of humanity. The organization has committed to use any influence it obtains over AGI’s deployment for the good of all and to avoid enabling uses that could harm humanity or unduly concentrate power. The mission encapsulates an ethical framework as well as a drive for technological development. OpenAI aims to ensure long-term safety in AGI, leading the charge in research and policy-making to make AGI safe, while also promoting the adoption of safety precautions across the AI community.

Products, services and projects

ChatGPT

• ChatGPT is a language-based chatbot written in Python that was released at the end of November 2022. It is built upon GPT-3.5 and GPT-4 models, models that are based on the transformer architecture developed by Google.
• It was originally released as a freely available software, but with its huge popularity it now operates as a freemium service with a $20 per month subscription.
• ChatGPT is trained with text from a wide variety of sources which include books, articles and websites from many different countries. This has enabled functionality of multiple languages and the ability to write in many different styles.
• The training of GPT-3 took several weeks on a set of powerful GPUs optimised for this purpose, in order to iteratively optimise the parameters using a massive data set.
• ChatGPT has many versatile applications which include but is not limited to content creation (such as writing poetry and short stories), drafting professional emails and teaching.
• The availability of the ChatGPT API has allowed developers to integrate it into their applications which could be used to enhance user interactions (designing a help-bot, search suggestions), for example.
• ChatGPT has its limitations in the sense that it learns patterns without understanding what they represent. Therefore, it has tendency to generate incorrect or nonsensical responses, such as code it provides or links to the internet (which frequently do not exist).

DALL-E

• DALL-E was introduced in January 2021 and in April 2022, DALL-E 2 was released as a more powerful image generation tool powered by artificial intelligence.
• It makes use of deep-learning technologies to be able to generate images from language descriptions, also known as prompts.
• OpenAI allowed integration of DALL-E 2 in developers’ own applications with the release of its API in November 2022. This operates on a cost per image basis, where the usage of images with higher resolutions would lead to greater charges.
• Despite using a language-based model powered by GPT to generate the images, DALL-E struggles with generating text as it only knows how to read a caption and draw an illustration. Therefore, it has no knowledge of images such as x-rays, blueprints and text and aims to simply produce a similar-looking image which leads to the contents of the image making no sense.
• There are also ethical concerns as the usage of large datasets could influence the model, such as generating more images of men than women when gender isn’t specified. OpenAI also confirmed that the model inserts words into prompts to address the bias in training the model, such as ‘an Asian woman’ when race isn’t specified.
• Another concern is that DALL-E could potentially replace photographers, artists and graphic designers due to their efficiency of generating anything the user wants.

Whisper

• Whisper is an automatic speech recognition system, trained with 680,000 hours of training data collected from the web.
• It is capable of transcribing speech in multiple languages, including translations to languages similar to English. It had been trained with data covering various accents to improve its accuracy in identifying sentences from people all around the globe.
• An application of Whisper is its usage in ChatGPT’s iOS mobile app, where users are able to ask prompts with their voice.

Revenue breakdown

OpenAI is valued to be around $29 billion in Febrary 2023.

ChatGPT is reported to have made less than $10 million in 2022, but has projected revenues of $200 million in 2023 and $1 billion in 2024. This sharp increase is due to the rapidly increasing userbase, from 1 million in December 2022 to 100 million in February 2023.

It is estimated that it costs OpenAI $3 million a month to run ChatGPT due to the huge processing power it needs. This data is from December 2022 when there was significantly less traffic, so it is likely the cost of maintaining ChatGPT is much more now.

Microsoft has committed a multibillion dollar investment in OpenAI to partner with them and develop supercomputing systems powered with Azure, which is a cloud computing platform. This includes a $1bn investment in 2019 and a $10bn investment was announced in January 2023 . This is reported that the deal entails 75% of OpenAI’s profits until the investment is reinbursed and a 49% stake in the company.

Breakdown of OpenAI's traffic by industry

Leadership

Sam Altman, CEO

• Responsible for overall company strategy, high-level decisions, and business partnerships. Former president of Y Combinator, co-founder of multiple startups, and personal co-founder of OpenAI. Noted for expertise in entrepreneurship and investment.

Greg Brockman, President & Co-Founder

• Involved in shaping OpenAI's strategy, thought leadership, and representation in public forums. Former CTO of Stripe, a leading technology company specializing in online payment infrastructure. Known for deep technical expertise and strategic vision.

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Brad Lightcap, COO

• Brad Lightcap serves as Chief Operating Officer of OpenAI, overseeing its business, operations, and strategic partnerships across Research, Applied AI, and Go-To-Market. He also manages the OpenAI Startup Fund. Previously, Brad was part of Y Combinator Continuity and led finance and operations initiatives at Dropbox. He holds degrees in Economics and History from Duke University.

Ilya Sutskever, Co-Founder and Chief Scientist

• Focuses on research and development, leading the scientific efforts in AI and machine learning. Former Google Brain researcher, holds a Ph.D. in Machine Learning, and has made significant contributions to the field of deep learning.

Mira Murati, CTO

• Murati started her career as an intern at Goldman Sachs in 2011, and worked at Zodiac Aerospace from 2012 to 2013. She spent three years at Tesla before joining Magic Leap. She then joined OpenAI in 2018, later becoming its chief technology officer, where she leads the company's work on ChatGPT, Dall-E, and Codex. Her responsibilities include oversight of the company's research, product and safety teams. She is an advocate for the regulation of AI.

Janine Korovesis, VP Finance

• 
  Janine Korovesis is a CPA with a diverse career spanning academia, consulting, corporate accounting, and executive leadership. They began as a Graduate Student Instructor at the University of Michigan Ross School of Business in 2008. Their professional journey includes roles at EY, Northern Trust Hedge Fund Services, Accretive Health, Google, and X, the moonshot factory. Since 2018, Janine has been at OpenAI, where they were promoted to VP Finance in 2022. She is Responsible for financial management, including budgeting, forecasting, and reporting. She also served on the board of advisors for PocketPatientMD from 2016 to 2018. In terms of education, Janine holds a B.B.A. with a focus in Accounting and Business/Management and a Master of Accounting, both from the University of Michigan. They obtained their CPA certification in Illinois in 2010 and in California in 2020.

Bryan Banisaba, Chief of Staff

• 
  Chief of Staff at OpenAI, Bryan is responsible for scaled growth, strategic planning, program management, and operational excellence for the Trust & Safety organization. Their role is critical in ensuring the safe development and responsible utilization of Artificial General Intelligence (AGI), aligning with OpenAI's mission to make AGI beneficial for all of humanity. They play a significant role in shaping and implementing robust policies, platforms, and teams to meet these goals

Ownership structure

-OpenAI's unique ownership structure reflects its transition from a non-profit organization to a capped for-profit entity. Initiated in 2019, this change set a limitation on investor profits, capping returns at a maximum of 100x on any investment made into the company. This unprecedented structure was engineered with the ambitious goal of developing artificial general intelligence (AGI), which has the potential to unlock vast economic value, but also necessitates responsible wealth distribution.

-In addition to transforming its organizational status, OpenAI entered into a strategic partnership with Microsoft. Microsoft invested $1 billion and became OpenAI’s exclusive cloud provider. This alliance not only provided OpenAI with essential capital but also with a robust cloud infrastructure to facilitate its research and development activities.

-Two years after Microsoft's initial investment, OpenAI’s ownership diversified further through a stock sale to reputable venture capital firms. These included Sequoia Capital, Tiger Global Management, Andreessen Horowitz, and Bedrock Capital. These investments served to bolster OpenAI's capital base and potentially provided strategic advantages through the VC firms' extensive networks and expertise. Come 2023, reports emerged that Microsoft was considering an additional $10 billion investment in OpenAI, which would value the company at an estimated $29 billion. This proposed deal has a rather distinctive structure. Microsoft would be entitled to 75% of OpenAI’s future profits until the $10 billion investment is recouped. Following that, Microsoft's share of the profits would drop to 49% until it reaches its own capped return, the details of which would be defined in the final agreement. This structure underscores the symbiotic relationship between the two entities while also aligning with OpenAI’s capped profit ethos.

-Notably, OpenAI's capped profit structure also extends to limited partners (LPs). Once an LP reaches their maximum return of 100x, as set by individual agreements, the ownership remains but the profits accrue to OpenAI LP, the organizational body overseeing OpenAI’s operational aspects. This setup ensures that after fulfilling the capped returns for its limited partners, OpenAI would essentially become a self-sustaining entity.

-The driving force behind this intricate structure is OpenAI’s mission to responsibly develop AGI. The belief is that if AGI were to be achieved or approximated, it could generate trillions of dollars in economic value. Given OpenAI’s origins as a non-profit with a focus on the ethical implications of AI, the capped-profit structure aims to allow for the redistribution of this immense wealth to the public through a non-profit foundation.

-As of 2023, other venture capital firms like Thrive Capital and Founders Fund have also expressed interest in acquiring existing shares of OpenAI, indicating the growing investor interest in the company’s technological ambitions and unique economic model.

Corporate strategy

1. Broadly distributed benefits: OpenAI commits to use any influence it obtains over AGI to ensure it is used for the benefit of everyone. It also seeks to avoid enabling uses of AI or AGI that harm humanity or concentrate power unduly.
2. Long-term safety: OpenAI is dedicated to researching and promoting the safe use of AGI. They have expressed concerns about AGI development becoming a competitive race without adequate safety precautions. If a safety-conscious project gets close to building AGI before OpenAI, they commit to stop competing and start assisting that project.
3. Technical leadership: OpenAI believes that in order to effectively address AGI's societal impact, it must be at the forefront of AI capabilities. Policy and safety advocacy alone would not be sufficient.
4. Cooperative orientation: OpenAI actively cooperates with other research and policy institutions and aims to create a global community working together to tackle AGI's global challenges.

Competitor analysis

DeepMind

• An artificial inteligence research company founded in the UK in 2010, and acquired by Google in 2014. It now belongs in Alphabet.
• It’s notable for developing neural networks that can imitate humans in activities such as playing video games, and computers that can mimic the short-term memory mechanism in the human brain.
• It is also famous for developing AlphaZero which uses deep reinforcement learning to defeat humans and other specialised computer software such as Stockfish in games including Chess, Go and Shogi.
• It has also made advances in biology by making significant advances in protein structure prediction.
• It is reported that DeepMind made around $890 million in 2021, a significant improvement from $60 million in 2020 and a $650 million loss in 2019.

Anthropic

Anthropic released Claude with partners including Notion, Quora and DuckDuckGo which is a chatbot and a competitor for ChatGPT.

Claude is able to summarise long pieces of text, perform creative writing and engage in conversation. It is also able to detect tone and adjust its response accordingly.

It is estimated they make $15.4 million a year, which mostly comes from selling API access to Claude.

In late 2023, Google invested $300 milliion in Anthropic which lead to Google owning 10% stake in the company.

Cohere

• Cohere has many products working with text including summarisation, generation and classification, similar to the abilities ChatGPT and Claude possess.
• The main target of Cohere are enterprise users therefore they focus on high-performance, secure and reliable language models. They have currently raised $170 million and once it reaches $6 billion valuation additional funding would be obtained. It is estimated that Cohere made $2.3 million in 2021.

Financials and Statistics

Chat GPT is the fastest platform to reach 1 million users compared to some of the other popular social media and streaming platforms such as Instagram, Facebook and Netflix. Chat GPT reached 1 million users in 5 days while Instagram took 15 times longer (75 days) and Netflix took 3.5 years.

Chat GPT also reached 100 million users in only two months further reinforcing the rapid growth of its customer base.

OpenAI witnessed around $10 million revenue in 2022. It is expected that OpenAI will generate $200 million revenue by 2023 and $1 billion by 2024.

Around 1.7 billion visits are recorded per month and number of visits per day is north of 56 million. The number of monthly visits has rapidly increased over the last few months even though in June 2023 the monthly visits reduced by 200 million compared to May 2023.

The launch of Chat GPT towards the end of 2022 and new version in March 2023 escalated the popularity of Open AI. This resulted in peak popularity as shown in the graph below.

Majority of the Open AI visitors are the younger generation. The 18-24 years old age segment  makes up just under 30% of the total visitors while the 25-34 years segment makes up the largest proportion (around 35%).

Risks

1. Dependence on Talent

OpenAI has a highly talented workforce which allows it to create advanced platforms and services for its users. Therefore, the company is very dependent on the researchers and engineers in its teams. The competition in the market is fierce so if the employees are offered better salary packages and incentives, they could leave and join the competitor firms. As a result, OpenAI risks loosing vital knowledge and expertise on the released and other services currently under development.

2. Uncertainty about the real world impact

Many of the OpenAI services are in the research phase and their exact implication in the real world in not yet completely known. It is unclear as to how these developments will be applied to the practical world to resolve some of the problems and the expectations could be unrealistcally high. It will take more time to understand the exact applications and benefits of these new services and platforms in the real world.

3. Competition

OpenAI is facing fierce competitions against other major industry players such as Facebook and Google who have also invested significantly in AI research. Additionally, new players (smaller start-ups) are emerging in the market.  OpenAI risks losing its customer base and top employee talent to its competitors.

4. Regulations

Across the globe, governments are placing new strict regulations to ensure that advancements in AI technology considers privacy, bias and ethics. New regulations could stunt the development of further ambitious AI technology and limit the wide variety of applications of the current innovations.

5. Cyber Security Risks

As some of the services and platforms offered by OpenAI become more popular, it becomes more venerable to cyber attacks. Open AI naturally accesses a large amount of data, some of which can be very sensitive making it an ideal target. Any malicious attacks on its system could land OpenAI in lots of legal consequences.

6. Supply Chain

AI technology is dependent on hardware such as graphic processor. As the demand for the advanced technology rises, any problems with the supply chain could be a significant risk

7. Public Perception

The general public might be hesitant to use technology which incorporates a significant amount of AI. There might be a general resistance from the consumers which needs to be overcome and acquiring consumer's trust and resolving any misconceptions or concerns will take some time.  

ESG Factors

1. Environmental (E): OpenAI's direct environmental impact, in terms of operations, might come from the computational resources required for training large models like mine. Energy consumption, especially from non-renewable sources, is a concern in the AI research community. OpenAI has been part of discussions regarding the environmental impact of training large models and has acknowledged these concerns in the past.
2. Social (S): OpenAI's mission is inherently social – to benefit all of humanity. They are committed to ensuring AGI's benefits are broadly distributed and avoiding uses of AI that harm humanity. They actively collaborate with other institutions, aiming for a cooperative global approach to AGI.
3. Governance (G): OpenAI's charter outlines its governance approach, emphasizing long-term safety, technical leadership, and cooperative orientation. OpenAI is also committed to transparency, although they note that safety and security concerns may reduce their traditional publishing in the future.

Deal Rationale

As of the writing of this report no financial data has been made available to the general public. The only indication of OpenAI's value is the investment size made to OpenAI by various Venture Capital firms (including Sequoia Capital, Andreessen Horowitz, Thrive and K2 Global) and large technology conglomerates (including Microsoft). The venture capital firms have invested just over $300 million and Microsoft has invested $10 billion. This gives OpenAI a valuation of $28 billion dollars. The venture capital firm's aims seem transparent enough however, microsoft's investment in OpenAI is much more nuanced (explored more in the next section).

Microsoft's Investment Rationale

• To supercharge its supercomputing division through vertical integration.

With ChatGPT running on the Microsoft Azure cloud system, the demand for Azure to have supercomputing capabilities will increase allowing Microsoft to 'future-proof' its cloud infrastructure. Azure in its current state was slated by reviews for its high cost and average performance. With the ChatGPT model running on the Azure cloud system, Microsoft will be able to hone their AI computing abilities and make the Microsoft Azure solution more reputable and capable (in terms of performance), not just for small scale cloud services but large and high complexity cloud services.

• To increase the competitiveness of Bing through vertical integration.

Microsoft's search engine Bing has long been inferior to Google's dominance over the market. However, Microsoft aims to supercharge Bing with the general intelligence power that ChatGPT has been known for. As recently as of March, Microsoft have confirmed this with the ChatGPT 4.0 model having successfully run Bing for its preview customers in March.

• To stabilise Microsoft Azure's revenue.

With the lukewarm reviews Microsoft azure received, its revenue may not have been assured (as higher-demand clients choose fancier cloud solutions). Microsoft's large investment in OpenAI assures Azure to be the exclusive cloud platform for all of OpenAI's services, bring consistent revenue to a new and turbulent sector.

• OpenAI is the safe option.

When Microsoft announced it $10 billion investment in OpenAI, it did so at a time of uncertainty in the market. High inflation and interest rates left the M&A market subdued pushing companies towards safer investments. Considering Microsoft's initial investment of $1 billion into OpenAI in 2019, along with the success of its launch in November 2022 , the $10 billion investment seems like a very safe bet.

Capital Structure

While the exact information is not open to the public, a person familiar with the discussion said that the $10 billion dollar investment expected to be paid in cash instalments over a multi-year period.

Precedent Transactions comparable to OpenAI

Acquirer Name	Target Name	Date	Offer Value (in millions USD)
Google	Deepmind technologies	2014-01-26	$ 500.00
Sales force	Tableau	2019-08-01	$ 15,700.00
Broadcom	Symantec Enterprise Security Business	2019-11-04	$10,000.00
Prosus	Just Eat	2019-11-11	$ 7,800.00
Microsoft	Zenimax media (bethesda)	2021-03-09	$ 7,500.00
Microsoft	Linkedin	2016-12-08	$26,200.00
Microsoft	Nuance Communications	2023-03-01	$19,700.00
AMD	Xilinx	2020-10-01	$49,000.00

With OpenAI having an approximate valuation of $30 billion dollars based on a $300 million dollar share sale, the table above shows a list of comparable transactions in the TMT sector. The closest company in the table to OpenAI would be Deepmind which only achieved a valuation of $500 million. However, this was at a time when the limits and capabilities of AI weren't known.