OpenAI poses an intelligence test to new investors

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Battling the science of artificial intelligence is not for the faint of heart. The same is true of investing in OpenAI, the pioneer of productivity-enhancing chatbots.

A $6.6 billion injection of investor funding, which OpenAI announced Wednesday, gives Sam Altman's nine-year-old company a post-money valuation of $157 billion. It adds Japan's SoftBank to a list of investors that already includes Microsoft, Jared Kushner's Thrive Capital and Khosla Ventures. For a company whose founder envisions “shared prosperity to a degree that seems unimaginable,” the price may seem cheap. To say the reality is more complex would be a gross understatement.

Altman's investors need to be comfortable with at least four levels of complexity. There are products, of course, so advanced they can answer PhD-level questions in physics. OpenAI's governance is more head-scratching. Altman was ousted last year, then quickly returned. Several executives have since donated their virtual parachutes. Maximum power is theoretically vested in a board whose purpose is to ensure OpenAI benefits humanity; Altman's hokey-cockiness showed his toothlessness.

Supporters also have to navigate finicky financial engineering. OpenAI is essentially a non-profit company that is responsible for profits. Investors own a share of future earnings, capped at a certain level of return. Undoing these two features is not an easy process, practically or politically. Whatever emerges has considerable potential for skewed incentives between investors and executives like Altman.

No less ambiguous business models. OpenAI expects to generate $100 billion in revenue five years from now, the New York Times reports. But how? If it can double the price of its paid version of ChatGPT to $44 a month, as it hopes, it could tip about 200 million paying customers, about half of those paying to use Microsoft's Office 365. But the demand for the products is being forecasted Anything that doesn't exist yet is a fool's errand. Likewise, figuring out the cost of feeding ever-godlike models with chips and energy.

At a $157bn valuation, OpenAI investors are paying around 13 times the company's estimated $12bn in 2025 revenue. That might sound modest: fellow AI icon Nvidia trades at 18 times, according to LSEG data. Then again, Nvidia is extremely profitable, while OpenAI is burning $5 billion a year. True, losses in technology are common. In 2017, Tesla had $12 billion in revenue and $2 billion in losses. Although the car maker had a market capitalization of $50 billion.

For now, OpenAI is less of a company, and more of an idea. Granted, this is an exciting one. If Altman's model can scale Olympian heights, so can his company, as Tesla did. But the investors making the call today will surely be driven more by instinct than intelligence.

john.foley@ft.com