OpenAI’s $6.6 Billion Fundraise, Meta’s Quiet Election, Imaginary AI Friends

0:00OpenAI just raised$6.6 billion at a$157 billion valuation, the largest VC funding round in history. Meta has had a remarkably quiet election and our imaginary AI friends now the future of social apps and perhaps our lives. That's coming up right after this.

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0:50Welcome to Big Technology Podcast Friday edition, where we break down the news in our traditional cool-headed and nuanced format. The OpenAI fundraising is finally in, and we have a bunch of other fun stories to speak with you about. Joining me, as always, on Friday is Ranjan Roy of Margins. Ranjan, welcome. Great to see you. Good to see you. OpenAI did it. They did it. Yes. So it finally happened. They've raised$6.6 billion in new funding. The investors, it doesn't include Apple. It's just a billion from Microsoft. But they have SoftBank involved. They have Thrive Capital. NVIDIA is also investing$100 million.

1:27And they also have Tiger Global. We can't forget them. And Cathie Wood, of course, is in. And so is Altimeter Capital. So that's how the round has shaped up. Any idea that they had potentially been struggling to fundraise, which is something that I admit I've brought up on the show, that's gone to bed as the largest VC fundraising in history. So I will admit I got it wrong that there would be some trouble. Of course, hottest name probably in tech in a decade. They figured it out, but it did come from some untraditional sources, shall we say. The big names like Sequoia and Dresden Horowitz didn't participate.

2:06Ronton, what do you make of the final shape of this fundraising? This is exactly what I was hoping for. And I admit myself, I think both of us have been throwing a little bit of cold water on this fundraising round and saying maybe if they did not raise this, then this would be the moment, the inflection point for generative AI, especially given all the other questioning that's coming out about the technology and its adoption. but it happened and boy, did it happen. I mean, this is like the megalopolis of funding rounds right now in my mind, because it's not just huge and ambitious, but it's also, I don't know, it's ridiculous.

2:48It's Tiger Global putting in$350 million, Cathie Wood putting in 250 mil, Altimeter putting in 250 mil. It's every high growth, high momentum, late stage fundraising name that I've written plenty about, you've written plenty about, that dominated the headlines in 2021. They're all in it. Even the UAE's new state-backed sovereign wealth funds in it. It's like the who's who of who bets big late stage. But I mean, now even more so, I think this is, everyone is going to have to watch what happens right now. Okay. So there's plenty of details involved here that we're going to get to, including opening eye asking these investors not to invest in competitors and a potential chance for them to get their money back if certain conditions aren't met.

3:37But I need to pause here and say, Ranjan, you said this is the round you've been waiting for. It seems like all of these names that you're listing are like red emoji flag for you in terms of the things that you're worried about. I know, but this is, okay. For the last few years, you know, when Tiger and Altimeter and certainly ARC and Cathie Woods Fund, you know, when they kind of created this whole late stage momentum style of fundraising that was completely in vogue for a couple of years, that seems to have quieted down, this is back and in such a big way of betting big and almost willing these kind of IPOs into existence and these valuations into existence simply by the value of putting so much money into it, that I thought this was kind of going away.

4:31But now they're coming back and saying, we're going to go as big as ever. If this fails, then I'm almost happy because I've always felt this is a somewhat problematic mode of funding and it's not good for overall capital markets. So the reason I've been waiting for it is this is the biggest bet on this style. Wait, sorry, did we even mention SoftBank? My man Masayoshi-san is here. He's in. Like everyone, this is like the Avengers of this kind of funding, bringing everyone together in the most absurd, massive funding round ever. That's why I'm excited about this one. What does it say about OpenAI that they had to resort to this type of fundraising?

5:13I mean, the truth is it was either going to be this type of fundraising or a big fundraise from tech giants like Microsoft, right? Like you're not going to necessarily, you cannot power this round with A16Z money, can you? Well, I mean, at least having A16Z and Sequoia as part of it, I think they could definitely start getting towards this kind of number. But I think it's still so telling, and that's why this makes this the most interesting fundraise in my memory, is because they don't have – remember, Sequoia, A16Z, all of them have been raising large, at least billion-dollar late-stage growth funds.

5:50This is exactly the type of investing they have been pushing towards away from just being seed and early-stage specialists. This is where they're supposed to be, and they're not. And the names coming in are Masayoshi-san, Kathy Wood, names I would never want to bet the future of my company on. But to raise this kind of money, I mean, I agree that to get this volume of capital at this stage, given the type of company OpenAI is, they did not have other places to go. They had to go for this kind of money. And we always talked about how it was going to be a difficult fundraise. Like there were going to be some fundamental problems here, including the fact that they were not yet converted to a for profit, including the fact that they have the weird governance.

6:36I mean, let's not even we got to get into that as well. But just to start. And let's just start with the fact that, OK, they're raising this 6.6 billion. But when are they going to need to raise again? Right. Because this is, again, coming from Ed Zitron, who's been, again, tallying this up. We talked about the subprime AI crisis a couple of weeks back. The company is expected to lose$4 or$5 billion a year. And it's going to raise$6 billion. So what is its runway? Like 14 months? So is it just going to be in this perpetual cycle of needing to go out and raise these type of sums? And if you're so interested in whether this bet is going to work, are we going to get the answer?

7:16Like in somewhere sometime in mid or late 2025? I agree with you. I think so the timelines are really worth kind of going over in detail. As you said, losing potentially five plus billion dollars a year. I mean, and they're actually saying that they're going to potentially invest more in frontier models, which is the single most expensive thing you can do. And let's not forget that they haven't really built out their entire actual business enterprise infrastructure yet, which is a very expensive thing for anyone to do. So if you think the runway is around 12 to 14 months, and which it could very well be, but then they have two years to convert themselves into a for-profit entity, which is already, let's recognize, so weird that the biggest VC funding round of all time is for a nonprofit that has promised to convert itself.

8:18And if it doesn't, the investors will be able to collect a 9 % interest rate on their money. So basically, they invested, if it's 16 months from now or two years from now, and OpenAI has not converted, you get your money back at a 9 % interest rate, which doesn't make any sense. Because how would that money still be there in two years? I mean, almost by definition, they're going to have a burn rate greater than their revenue and be losing money. So it just is so odd and interesting that especially those timelines, they just don't match up in my mind. So basically, they get to this end of this timeline.

8:58They're not converted. Those companies aren't getting that money back. No, of course not. I mean, there's simply no unless like there's no capital left. Where in the world is that? I mean, maybe the Norwegian Sovereign Wealth Fund or like, I mean, I just don't know. Open AI, the nonprofit is crushing it and decides it wants to stay there and just say, all right, we give you your interest. We move on. Yeah. Well, no, but what capital is left? There's none in the world. Well, they're going to have to, it's crazy to say it, but they're going to end up having to be profitable at some point. Or they're just going to IPO unprofitable.

9:34Which many Tiger Global, SoftBank, Altimeter, ARK Investment Management, these are the companies that perfected the art of bringing unprofitable companies to the public markets, passing it off to the public investors at large and watching the stocks collapse. So they've gotten pretty good at that game. Can it work at this scale? That's a different question. Is this funding round also just the, I don't want to say the end, but a really important shift in the relationship between Microsoft and OpenAI? Now, Microsoft invested at$13 billion,$10 or$13 billion in OpenAI, and basically gained a trillion in market cap because of it, somewhere in that range.

10:21and now the new round comes up and they're investing a little less than a billion dollars and letting others lead the round while building their own capabilities internally now it's kind of weird to say all right they're going to invest 900 something million dollars in the biggest funding raising biggest fundraising round of all time and sort of distance themselves from the company but it just like reading the vibes that's sure like what it feels like to me I think, yeah, I think they are. I mean, again, they just had a massive co-pilot launch event where they were kind of highlighting all the different features that they're integrating into Office 365 and across the Microsoft ecosystem.

11:00So they are clearly embedding on their own horses right now. I also, one thing I've been wondering is, do the cloud credits that we're investing, you know, does that actually somehow still multiply in 10x in what you've already made when you invested 13 billion or 12x now it's at 157 billion? Like there's so many layers to the existing funding that's gone into the company and even the current round that are so unconventional that it just who makes money where and when is still unclear to me from all the reporting. Well, do you think Elon should get money if he helped found the thing with$50 million and the IPO should get an ownership stake?

11:47I mean, I say yes. Actually, I say yes, too. Just throw him in there because I want him next to Tiger and Masayoshi's son. Can you imagine that what the scene would be like of all those characters ringing the bell at NASDAQ on opening day. I mean, you know what? That almost has me rooting for the success of an IPO. If you line everyone up, take them all out to dinner, bring them the next morning, ring the bell, that would make my year, I think, just for the entertainment value. So there's another aspect to this also, which is that OpenAI really is. Like we talk about, you know, are they going to be able to pay that money back with interest?

12:26It's not going to happen because they really are going to convert themselves to this traditional for-profit or maybe some sort of B Corp or whatever it is. They are now starting to act in less like change humanity for good and more like, again, ruthless cutthroat company where they're asking these investors not to invest in competitors. That includes super safe, super intelligence, which is Ilya's company, which is unbelievable, Anthropic XAI. What do you make of the fact? I mean, isn't that kind of like a show of weakness that you're asking these groups not to invest in competitors? I actually, oddly enough, was not as bothered by this.

13:08And apparently Uber had done this very aggressively in the past and, you know, especially in the helping kneecap lift a bit. The reason I'm actually not against this is this is more how traditional VC worked in my mind. In your portfolio, you rarely invested in direct competitors. You bet on which you thought was the winning company. The idea that they're saying, invest in us, but don't invest and try to fund competitors that could potentially ruin this investment seems actually a reasonable thing. In this case, it feels a bit petty given And it's all kind of the same group of people for the most part.

13:52All OpenAI co-founders. These legitimately are all OpenAI co-founders. Elon Musk, OpenAI co-founder. Ilya Sutskever, OpenAI chief scientist. Dario Modi, the guy who built the GPT models. Like it's basically any people that have been within OpenAI, don't give them any more money. And they know that they're going to need the money because that's what it takes to scale these models. Yeah. No, no. It feels a bit personal. Especially, yeah, and I think the founder of Anthropic was even saying just how expensive, again, the next generation of frontier models is going to be. So I think, to me, again, from just a traditional capital markets perspective, I actually don't find it that ridiculous.

14:35But you can only imagine, given these are people who are close to each other, that this stuff is personal. so the information also has a little bit more information about what opening has been telling investors and i wanted to get your take on this ranjan so this is the revenue forecast so they think next year the revenue is going to triple to 11.6 billion triple and then double again to 25.6 billion the year after do you think reaching that level of revenue is feasible for this company What? It's a tough question, I think, because we still don't know. I genuinely believe, again, as someone who is bullish generative AI, we don't know what the market, total addressable market looks like and how it's going to play out.

15:28We know general things around cloud spend and software spend. And if generative AI kills all of SaaS, then obviously all that spend gets moved over to one of these companies. So I actually don't think that the idea that a company like OpenAI could or should make$26 billion in two years is actually that crazy. Whether OpenAI is the company that's in a position to do it and execute on that, I think it's pretty ambitious. And again, it keeps coming back to the idea that, and we've talked about it a lot, they are not built and run like a traditional enterprise software company. They don't have the salespeople and the customer success people and just that entire infrastructure.

16:14It's a research house with an API on top of it and a great consumer product, which those things will not make that much money. It won't be the consumer product because we've had this tweet in our doc for a couple of weeks now and time to read it. So Tanehaipura, who's a former Meta employee, shares great stuff on X. He said, Anthropic is expected, and it's from CNBC, Anthropic is expected to hit$1 billion in revenue this year. and that's a thousand percent increase year over year and this is the breakdown of their revenue third-party api through amazon is 60 to 75 percent direct api is 10 to 25 percent and then claude subscription is 15 now i expect open ai's chat gpt to have a much higher percentage or at least a higher percentage of chat gpt subscriptions than anthropic because claude is much less known except to listeners of this show.

17:08That being said, it is going to have to come through this API, right? It's going to be the enterprise that's going to be spending triple, you know, double whatever it is, and not the consumers. Is that the right read? What do you think? I think this is actually an incredibly important thing. There's even one part of it that I thought more interesting than obviously that at the high level, more revenue coming from your enterprise or more business-focused API calls versus consumer-facing subscription revenue is going to be a lot stickier and just a more promising business model. What was really interesting to me is that they specified via Amazon, that meant third-party API.

17:50That meant their model being used in other cloud infrastructure and not developers where direct API is only 10 % to 25%. So the majority of their API usage is being used in other cloud infrastructure, which if we remember, Amazon, who we don't hear very much in this whole conversation about, they originally, the promise was you can try all these models very easily in AWS infrastructure. So it looks like the Anthropic models are actually very active in that space, which is probably the smartest place to be versus people going directly to you. So I think the big battleground could actually be in AWS, in Google Cloud.

18:31And it looks like Anthropic is doing pretty well there. Yes. Okay. Let's close with a couple of quotes from Brad Gersner, the altimeter investor who was at the GeekWire conference this week and was talking about the investment. First of all, about OpenAI's ability to ship amid the chaos. Look in the middle of all this chaos in nine months at OpenAI and what's happened? The numbers have accelerated. They are launching new products. That's not a sign of fragility. What do you think about that? Yeah, I agree with him there. I think the corporate drama has not been the issue that we've all been worried about.

19:07They keep shipping. They're growing. Whether it's going to realize$157 billion valuation, I have significant questions about. But overall, I think they have shown, to their credit, that amidst all these departures and dramas, they're still shipping, growing, and raising money. Now, this is the most revealing comment that Gerstner had to me. during this conference. He said that Microsoft's co-pilot as a consumer brand is going to have a hell of an uphill battle against ChatGPT. And he said the good news for Satya Nadella is that he owns a lot of ChatGPT. That is not the language I would use to describe a partnership, that they're going to have to battle each other.

19:46And it's good that he owns a good chunk of it. Yeah, I really think the Microsoft connection to OpenAI is effectively over with this fundraise. I think Like we've all been seeing the writing on the wall for a while. And I think now it's clear that they are direct competitors. And Microsoft has been very smart about kind of managing their potential financial returns on this. But otherwise, they're direct competitors. They're not friends anymore. Maybe they're getting discounted cloud credit. Actually, wait. because in Ed Zitron's piece, he had talked about in the numbers he had kind of calculated how that OpenAI is still getting effectively like paying 33 % typical cloud costs when they're using Microsoft Azure.

20:30Imagine if one day Satya says, by the way. That's true. But that being said, the amount of money that Microsoft put into OpenAI protects OpenAI, I think, more than it protects Microsoft because they don't want that to go to zero. I mean, if they their future is co-pilot, right? Like the in generative AI, they that's how they're competing, not against open AI, which is huge in the startup context, but is still tiny in the big tech context. So like if Microsoft ever started worrying about OpenAI competing and actually hurting their generative AI future that is going to push them against Google and Amazon and Meta, I think they could just turn that dial and say, it's time to pay full price.

21:20Yeah, but Copilot is powering. Oh, sorry, but GPT-4, like OpenAI's technology is powering Copilot, at least for now. At least for now. But it cannot be. They're not betting the future of. Well, they know they have to insulate themselves. I'm going to say this. They just invested nearly a billion dollars in open AI re-upping. I think to me, it's not the end of the relationship, but more of a careful distance. And if you're Satnian Nadella, that's smart. And if you're Sam Altman, maybe that's smart, too. So it gives you an opportunity to go and play with Tim Cook's products and see what you can do on that front.

21:53All right. That's fair. That's what it's all about. So we had the vice presidential debate this week. We're not going to talk very much about that. But one of the things I was thinking about, one of the things I've been reading about, and one of the things I'll be writing about this week is that, isn't it interesting that we're legitimately one month, I was gonna say four weeks, give or take, that we're one month away from an election. The US presidential election is on November 5th, 2024. Today we're recording October 4th, 2024. One month and one day away from the election. And we're not talking about Facebook at all.

22:30Mark Zuckerberg is not donating anything. He has a different company name. It's called MetaNow. We're talking about their tech products like Orion. Instagram and Threads have de-emphasized politics. and they have effectively seeded the game to TikTok and X. I personally think that this is a great move for Facebook and that politics and social media just don't mesh and that there was this original dream that if we connect with people and learn a little bit more about who they are, then therefore we're going to start to see them more as people, less as caricatures, and then we'll have a more thoughtful politics discourse.

23:11But the opposite has happened, right? The loudest, most outraged Beatty voices have risen to the tops, to the top. And politicians have decided that the most divisive content is going to be the content that will play the most on social media platforms. And here we stand ahead of the 2024 election. And Facebook is just like, yeah, we don't want anything of it. We recognize what happened. It was a mistake. We would rather you take a look at Shrimp Jesus, which we're going to talk about in the next segment, as opposed to anything that these candidates are saying. Go do politics somewhere else. I think that's a good thing.

23:45I'm curious what your take is on it. Yeah, this is such an interesting area to me because this is something I've thought and written about a lot. Meta's role, especially after the 2016 election, in 2020 around misinformation in general and the whole topic with COVID and vaccines. So for them to have just quietly moved away and us not thinking or hearing about them at all is pretty incredible. And I think there's two things that they did, you know, in a very smart way. I genuinely think the Mark Zuckerberg rebrand worked of the kind of like the cool guy with his chain and they all wear matching chains now.

24:27And, you know, I mean, they pulled this off where he's not some like the caricature of kind of a world dominating, terrifying figure. He's just like the cool guy with the next generation of augmented reality glasses. But the other thing is from a technical standpoint, they have done this. They've actually done this. And my Instagram feed is now like Instagram Reels, the way they've approached Instagram Reels to compete with TikTok has been fairly genius. Like right now, Reels comprise, I think I saw it was 46 % of all Instagram feed content. And 50 % of that is not even from accounts you follow, but suggested for you.

25:10So it's because, and I'll admit in my social circles, people just share Reels nonstop. We're millennials. sales. And they've done this very well. And it's not political content. It's all just kind of pure entertainment content. And so they've made the algorithm work in that way. And I think that that's a success for them, the fact that they're still growing without relying on needing to be the center of politics. The only thing that I worry about for them in this, they don't drive culture anymore. Like Instagram and Facebook are no longer the drivers of culture. X is for politics and any kind of like, you know, more reactionary type culture.

25:55And then TikTok definitely is more the driver of culture and trends for Gen Z or even products. And Instagram is the follower. Whether that in the long run could actually hurt them, I don't know. But right now they have really found this kind of Goldilocks spot of growing, getting more and more engagement, but still being this kind of light, entertaining content. Yeah, it's definitely like this is the question is the relevance question, because it is a risk, right? You become less relevant. Like we all we've talked about multiple times, how threads is less relevant. However, like there are, you know, if there's anything we've learned over the past few years is that there are formats that just do not work with social media.

26:36Like it is the, it incentivizes the opposite of thoughtful conversation on these platforms and them moving away from it has been good. They have started, this is according to the Times, they've recommended more content about like, you're talking about sports, cooking, animals, celebrity gossip, and they've left all that other stuff to Elon Musk. And that being said, like, this is like one of the parts of the Times article that I disagreed with. so the times was basically like even still politics is on facebook and the company can't get away from it and it's like yes of course politics is going to be part of any social network you can't prohibit people from talking about politics they're going to do it in groups they're going to do it wherever but you can decide not to recommend it and if you shrink the total pie i think you're doing you're doing a good thing so i wouldn't paint it in this negative lens no no i agree i think like whatsapp groups are probably still raging with uh and or even facebook groups are probably raging but what they did smartly is as you said like a stop elevating or pushing in by algorithm that kind of content and focusing on mudang and they probably that's the culture that's the pygmy hippo for those unfamiliar everybody knows mudang for those All right, I'm just checking.

27:55I'm just checking. It was a good SNL skit from Bowen Yang, if you're having to see that one. But no, no, I mean, that's the culture that they're creating, and they're probably very, very happy with it. And especially going into this election, I think they are in a very, very sweet spot right now. The only risk becomes, well, actually, when we'll get into the AI slop risk. But just as a starting point, no longer driving culture because I still think social platforms succeed the most when they're the ones that people go to because they're like, what's actually happening now? What do I need to know now to feel cool and informed?