OpenAI Closes in on IPO Near $1 Trillion Valuation

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2:22He joins us from our San Francisco bureau. Ed, we were going to talk to you about SpaceX at one point, you know, today or this week. That's what we've been talking about. And then we see the news that OpenAI could be filing in the coming days. What else can you tell us? Curious timing. Is it because of the lawsuit or is it because of what SpaceX is doing? Are these, you know, there's a lot of Elon tied up in this. Yeah. So, you know, our source at Bloomberg is saying that it's coming weeks. The journal had said coming days, you know, and there is a distinction between that in when you're filing.

2:58The net net is, you know, OpenAI being in a position where it could be ready to IPO September. We had been much more firm in our reporting on Anthropic that Anthropic was looking at October for an IPO, but very much framed in a race. Right. So to answer your question, the overhang was the trial. Musk suing Sam Altman, the CEO of OpenAI, and the other co-founder, Greg Brockman. And indeed, Bloomberg Intelligence has written about this in their research, right? Once the jury decided to reject Elon Musk's suit, even though Musk plans to appeal, it removed an overhang on the idea that OpenAI could move forward to an IPO, IPO in part because of the potential financial penalty that Musk was pursuing.

3:48That's where we stand. But still, Ed, the timing curious for maybe a few more reasons as well. I mean, we have SpaceX also preparing to go public. We have Anthropic. You have to wonder whether all of these firms are kind of rushing to tap into the public markets before the AI momentum slows down. Yeah, I guess that's an important point. Like whenever you have a big IPO, particularly a technology IPO, there always has to be a story behind it, right? You know, our reporting is that SpaceX's S1 could flip public today. Brace. It could be a wild few hours to come. But there's also the issue of like, is there infinite liquidity in capital markets?

4:30if SpaceX is going to do the biggest IPO of all time, add a valuation of more than$2 trillion, raise$75 billion, and then do the math on how much of the company they offer, does that take the oxygen out of the room for an open AI and or an Anthropic? If open AI and Anthropic both want to go public towards that September-October timeframe end of the year, that gives investors a really interesting choice. And part of what we've been reporting over the last six months in aggregate is like, Anthropic has a lot of momentum right now. And the big take overnight is a case study of SoftBank being very concentrated in open AI.

5:08These are all considerations. I love that story. If you missed that one, check it out on the Bloomberg Terminal. Today's big take, as Ed mentioned. And on the Anthropic side of this, does timing matter who's first? And because if we think about these two different companies, the way that they're valued and what they offer, is it fair to say that investors will be making a choice of one or the other? It's very bifurcated in private markets. There are those that stick to open AI, right? Softbank is an interesting example. There are several venture firms and late stage or private growth equity investors, indeed sovereigns, that have exposure to both.

5:50The latest reporting from us is that Natasha and I reported, I think it was last week, week before, Amphropic is now sort of taking more seriously, raising money in the private markets, like more than$35 billion at an evaluation between$900 billion and$1 trillion. The reports on what OpenAI's valuation would be in an IPO is$1 trillion. And basically, the way that it's put me, Tim, out here on the the left coast of the west coast is you have anthropic open ai google meta xai several lanes but in the market is there room for all of them and you know that conversation comes up quite a lot and i mean you have to wonder also like how much money how much more capital do they really need to raise ed can you tell us a little bit about like what are really the stated goals at least for OpenAI for what they would do with this new capital that they would raise from an IPO?

6:45Well, they do. They do. You know, the argument that OpenAI, to their credit, has been consistent on is that if they had more compute, A, users of their technology would not be constrained, right? That's something that's been talked about on social media just in the last 24 hours. But they could also offer more stuff. The concern is different. The concern is that the revenue growths just simply do not keep pace with the spending growth to justify an IPO, right? When you go public, through the mechanism of the filing, you open that up to the world about your business and the finances of that. And in the world of tech, profit isn't always important, but investors still want to kind of see what the plan is longer term, the total addressable market and the road to profit.

7:32And so that's more of the calculus with OpenAI. specifically. Well, let's talk about those books, Ed. I mean, it's a private company at this point. It's, you know, we don't know. We don't have full disclosures at this point. But what can you tell us what has been reported when it comes to OpenAI's books? What numbers do we know? I'm trying to scramble to pull up my notes now. But basically, you know, the revenue run rates in the tens of billions and OpenAI's own projections for the coming 12 months through the 2030 is for a lot of growth. But you have to remember that open AI is on the hook for also almost a trillion dollars of projects around the world, largely relating to infrastructure, where there's a mix of it's committing capital, or a partner is committing capital on its behalf, or it is on the hook to be the lead tenant and lease that capacity, but somebody else has built it.

8:20So that's the underlying concern, revenue in the tens of billions, but the exposure, the committed spending over time being in the hundreds of billions and that being worrying. Did I hear you say anything about profit? Yeah, I don't, you know, I just, I just don't think we're anywhere near that. Right. You know, how, you know, in the economics of AI for a company that trains a model and then deploys it through a series of products, it's on a dollar per token basis. Right. That's, that's the study, but your compute costs will directly factor into that. There are some people out there, Ed, who may be old-fashioned and say maybe a company should wait until it's profitable, at least for a few consecutive quarters to go public.

9:00Is that a different era? I don't know. As a student of Silicon Valley, and one of the reasons I came here to San Francisco, the people that back those companies at an early stage right through to taking them public, whether it's software or hardware, there's not really that focus. you know we should not get into this but it's like I remember the days where people were fixated on whether Uber would have positive EBITDA and it's like and there are plenty of companies we should know there are plenty of companies that do go public that are not yet profitable and there's definitely investor appetite no question yeah yeah yeah the one thing I would say real quick remember Rivian right was the sixth biggest IPO in US history and that was in 2021 yeah here we are they're still not profitable so you know that's a that's a good indicator.

9:47Who is poised to benefit most from the OpenAI IPO? And I imagine some of the investors in OpenAI right now are some of the ones that are also tied up in these other large companies potentially going public soon. Well, it's a mix of the strategics, which are other technology companies. I would say to the audience, go and read our reporting, which was linked to the trial between Elon Musk and Sam Altman, again, dismissed by the jury and the judge, but about Microsoft's economic gains from its initial investments in OpenAI. And then at the other end of the spectrum, you have somebody like Vinod Kostler of Kostler Ventures, a venture capitalist who wrote one of the first institutional checks into OpenAI at the time that was at issue in that trial, like very early stages where it was a very different beast.

10:37And so over time, and then the people themselves, right? Sam Altman has a very curious lack of stake in open AI, which you can read about. Greg Brockman has a more sizable stake. The individuals at play as well, that is what's at question here. It reminds us how open AI has been changing its business, sort of trimming or more focusing on certain parts of its business ahead of an IPO. I'm thinking about Sora, for example? Yeah. So like, you know, Sora was an interesting project. There was a partnership and sort of financial relationship with Disney that was scaled back. You know, Sora being a tool that is a text to image tool.

11:15So when we talk about a generative AI, generative can mean you create something that's in different forms. We're very accustomed to chat GPT where the input is text, the prompt is text, and the output is text. In Sora's case, it was image, but it didn't, you know, So both on usage and the compute costs and the net results of it didn't really work. So that's part one. The other part, you know, and this is where it pits itself more closely with Anthropic and based on our recent reporting, Elon Musk's XAI as well is going after the enterprise customer. You know, think in the world of finance or healthcare, et cetera, getting those organizations at scale to use either the underlying model or to use the tool.

11:55that has been an area where Anthropik really focused and it's been a big driver of revenue for growth for them. OpenAI's origin was chat GPT. Everyday people like you, me and Emily just using chat GPT for hours and hours, but they want that enterprise business to kind of outpace it. Right. I'm very curious if there's going to be any use of chat GPT, at least on the banking side. They're probably not allowed to do this, but drafting these prospectuses. But that's not my question for you, Ed. My question is, of course, when the paperwork finally comes out, can you sum up like the one or two big questions that you have about this company that will potentially be revealed in this paperwork?

12:37Wait, we're still talking about OpenAI? Yeah. Well, so this is the thing, right? So like there's mechanics to this. What we're talking about is in the first instance, reports from various media, including Bloomberg News, that they are thinking of filing confidentially. It hasn't even happened yet. Then there's a period of time where you don't know what's in it unless you know somebody pretty high up on the inside until it flips public. That's the moment we're waiting for today with SpaceX. SpaceX filed confidentially May 4th. Not May 4th. Tim, when was I in Florida for Artemis? The beginning of April.

13:12Yeah, beginning of April. Yeah, so then that was when we reported Siding Sources, the confidential filing. What happens after that is it goes back to the SEC. The SEC makes recommendations for how it could be changed and updated. And at some point, it goes public. And that's when you find out about everything. So I'm not answering your question, Emily, but I think we're probably a little ways off from learning. But it's about financials, where they see the addressable market, and then surprises along the way, like the structure of the company. But I'm really glad you went to SpaceX and that's where I want to end just in the last minute with you or so.

13:45And it's about SpaceX AI as it now is versus, you know, Anthropic and OpenAI, specifically in the context of OpenAI and a potential IPO. Because SpaceX now has XAI as part of it, does that pull some oxygen slash interest from OpenAI and Anthropic? Yeah, so like part, just one easy answer is like debt. So when SpaceX merged with XAI, the SpaceX part was valued at about a trillion, the XAI part 250 billion. So the combined entity 1.25 trillion. But SpaceX also took on XAI to its balance sheet, which would include debt. So then that should be disclosed in the S1 when it gets flipped publicly. There should be something in there about that.

14:30It's like also the story. Why is a rocket company who's building constellations of satellite for Internet, Starlink, and wants to build data centers in space, acquiring a frontier lab? That should kind of be answered, right, in the document and prospectus because it will help investors understand it ahead of the IPO. And there's also the question, Ed, that we don't have time to answer what it means for Tesla and Tesla shareholders because that's part of the conversation too. Ed Love, the co-host of Bloomberg Tech on Bloomberg TV. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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17:22I'm just curious about the business model here and how it will support a publicly traded company. You report on a lot of social media companies, meta platforms, for example, increasingly turning into an AI company. How are you looking at it? I mean, this is, I think, the most obvious and biggest question facing this company. When you are private, you can say, hey, we're going to spend$1.4 trillion on data centers and other AI infrastructure and kind of get away with it because investors are private investors. You're not doing that quarterly update, that quarterly analyst call. Once you are publicly traded, that$1.4 trillion you're spending on infrastructure is suddenly weighed against very public numbers around your revenue, your profits, things like that.

18:07And so to date, OpenAI obviously is making the bulk of its money from subscriptions for its AI products. It's dabbling in advertising. But as we've seen from Meta over the last couple of quarters, simply having a massive advertising business doesn't cocoon you from the criticism of spending aggressively on AI. So I think OpenAI is going to hit this reality at some point very soon, where people are going to see that they're spending a lot, but the revenue is minuscule in comparison. And we'll have to see how investors ultimately react to that. Yeah, Kurt, I'd love for you to talk a little bit more about how the two companies compare and contrast how they use AI, because obviously Meta has been around for such a long time.

18:50And we all know the Meta business model. We've all known this company for so long. They didn't start as an AI company. OpenAI clearly becoming a company in the age of artificial intelligence. Well, what's interesting is the two are trying to kind of get into each other's swim lane here. So in Meta's case, obviously, they're an advertising behemoth and have been doing this for more than 20 years, more than$200 billion in revenue last year, almost all of that advertising. But they're just rolled out their first sort of closed LLM and talking about potentially selling subscriptions to that. OpenAI is the opposite, right?

19:30They're making their money right now from selling those AI subscriptions, and now they're dabbling in advertising. So it's interesting to see these two that are currently playing in different sort of arenas eyeing one another as competitors as this moves forward. And again, I think ultimately it comes down to the spending. I think in Meta's case, they've proven, you know, even though they're spending a lot, they have a$200 billion ad business kind of sitting there that's been chugging along for years, very consistent, very predictable for the most part. OpenAI doesn't have that yet. So we'll have to see if they can ultimately get there.

20:03Yeah, the open AI ads that I get are, you know, I don't pay for open for my my personal chat GPT subscription. So maybe that's why I get the ads. But they're pretty rudimentary at this point. And they're just kind of like related to whatever I'm searching for. It's very like, you know, kind of old school Google. And the company says that, you know, the ads will never influence the way that it gives you an answer to something. um kurt i i just wanted to uh talk a little bit about um the ads portion of this at meta platforms because you hit on this and i was having a conversation with some folks about this this recently in terms of the way that that meta platforms uses ai you talk about it as this traditional ad business that is really chugging along but isn't the ad business becoming much more efficient and better because the ai is making our algorithms better and our the ad targeting better?

20:51That is certainly the story Meta's been selling to Wall Street. They say, look, we're spending all this money on AI. We may not be charging for a chatbot yet. We're not charging for an LLM yet, but our ads are getting super efficient. It's better for the advertiser, they would argue. If you're a small business, for example, you can come in and say, hey, we don't have budget to create a cool video for our product or even maybe take professional photos for our product. But we can use AI to do that now. The targeting is getting better. People are spending more time on Meta because the content recommendations are getting better.

21:24So they're scrolling longer, seeing more ads. That's the narrative for Meta right now with AI. They would love to expand that, of course. But today, the way that AI is paying back to the company is, as you mentioned, through the ads business. And we do want to get to your story, the coverage here about 8 ,000 job cuts at Meta. How much of it is related to the company's push further into AI and the AI just getting more efficient that a lot of these software engineers at Meta are no longer needed? I think that's the biggest thing. It's partly that some of their job responsibilities are being taken over by AI.

22:09It's partly that I think Mark Zuckerberg sees the potential of AI to help people do things they couldn't do before. So perhaps one or two people creating a brand new app or a brand new product with the assistance of an AI agent that would have previously taken a whole team of people. They've talked about these layoffs as flattening the org structure, so fewer managers, so they get more people actually creating things, more slices, chomps at the apple there. And I think that's what it is. It's a combination of AI taking roles and a combination of AI helping people become better, what they would call ICs, individual contributors.

22:49I think what is interesting and what we updated our story on this morning is that Zuckerberg posted internally and said that this will be the last company-wide layoff for this year. There was a lot of speculation that this is just the first of multiple. Now, as a journalist, I'm piecing through that comment, say, okay, company-wide layoff this year, perhaps there would be smaller ones. This year, perhaps they would do a company-wide one at the very beginning of next year. But again, I think he's trying to soothe some concerns right now because you can imagine employees at Meta are very unsettled by the fact that AI seems to be taking up a lot of their jobs.

23:25So who else is affected by this? I mean, these are pretty widespread. Yeah, these are global. We reported that product and engineering in this particular round are heavily impacted. I know there's, I think, some other groups that, for example, there were Reality Labs layoffs earlier this year. So I do think this was very product engineering heavy. It doesn't mean that it was exclusive to those groups. And again, there won't be company-wide ones later this year, according to Zuckerberg. I still think it's possible there could be smaller, more targeted sets of layoffs at some point between now and the end of the year.

24:02Kurt, just very quickly, I know that you don't exactly report on OpenAI, so I'm not going to ask about job prospects there. But is this similar to what we're seeing at other just kind of meta equivalent companies, more layoffs? Yeah, I think any tech company that's very heavy on engineering talent is going through this exact same dilemma and calculation right now. You are seeing these agents, in particular these AI agents, that can do, if not basic, sometimes mid and even higher level coding at a speed and scale that humans just can't do. And so if you are sitting there, especially if you're a publicly traded company and you need a narrative for Wall Street, you need to say, hey, I know we're spending$140 billion on data centers this year, but look it, we're being responsible in terms of headcount on the other hand.

24:53And I think this is a very convenient thing for tech companies to point to and say, look, we are taking this AI things seriously and responsibly. Kurt Wagner from the Bloomberg News technology team. He's senior reporter there who covers social media joining us from Denver. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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27:12at public.com slash disclosures. You're listening to the Bloomberg Business Week Daily podcast. Catch us live weekday afternoons from 2 to 5 p.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube. Well, homeowners looking to tap rising property values without taking on traditional debt have been flocking to so-called home equity investment contracts, or HEIs, in recent years. HEIs have been spreading rapidly across the U.S. with originations in 485 metro areas last year, up from just 131 in 2020. And the deals have also attracted backing from investment firms like Fortress Investment Group and Bain Capital, as higher interest rates make refinancing less attractive.

28:01But of course, as this market expands, the contracts are also drawing scrutiny from regulators and consumer advocates who argue they can be opaque, costly, and difficult for homeowners to fully understand him. So here with Moore is the author of this story, Patrick Clark, Bloomberg News real estate reporter. He joins us from Bloomberg's D.C. bureau. Hi, Patrick. Let's just start with the basics. What is an HEI and why have so many Americans been signing these investment contracts? Yeah, so these are called home equity investments or sometimes shared appreciation products. And the basic idea is you own a home, you sell a piece of your equity to a company or, you know, as it happens, it's actually a company that originates the contract and then flips the paper on usually to an institutional investor.