Is OpenAI financing with a valuation of $86 billion for the benefit of senior employees or for other purposes?

Interface News Reporter | Li Jingya

On October 19th, according to media reports, insiders revealed that OpenAI is in talks to sell existing employee shares at a valuation of $86 billion. However, OpenAI has not yet determined a distribution plan and the terms may still change.

As early as the second quarter of this year, OpenAI sold a wave of employee shares to venture capital firms, with media reports stating that the company's book value was approximately $30 billion. Now the second wave of tender offers is approaching, and its valuation has risen to between $80 billion and $90 billion, three times the previous level.

With a valuation of $90 billion, OpenAI has become a super unicorn after ByteDance and SpaceX. Even though the two giants Microsoft and Alphabet have market capitalization of 2.3 trillion and 1.6 trillion US dollars, their estimated revenue for 2023 is lower than OpenAI's valuation level. At present, Microsoft still owns 49% of the shares in OpenAI. If the stock is successfully sold, the value of Microsoft's shares in OpenAI will increase from the current $15 billion to $40-45 billion.

OpenAI does not issue new shares, but allows employees to sell their shares to external investors for cash out. This is a relatively high-profile fundraising method, known as "tender offer" in the capital market. The primary purpose of a tender offer is to provide liquidity for existing shareholders, especially employees and early investors, while the secondary purpose is to increase the company's valuation. Due to the fact that OpenAI has no plans to go public in the short term, this type of tender offer is more of a benefit for senior employees.

But is the purpose of OpenAI really so simple?

Currently, the equity structure of OpenAI is 49% each held by Microsoft and other venture capital VCs, with OpenAI funds controlling the remaining 2% and each investor having a different profit cap.

Specifically, OpenAI has established a "profit cap" architecture that sets a cap on the investment return of its limited partner LP. If the investment return exceeds the cap, the excess will be returned to the original non-profit organization OpenAIInc. The industry unanimously believes that the equity structure design of OpenAI is very clever, which plays a role in balancing corporate profits and investor returns.

FT Chinese once provided a detailed explanation of OpenAI's financing terms in an article, stating that if OpenAI cannot become a huge profitable company in the future, Microsoft will continue to pay for it; If the profit of $150 billion can be cleared to Microsoft and all external investors, it will completely shake off Microsoft and regain control of the company.

From a figure at the end of August, it can be seen that OpenAI's independence could have been put on the agenda earlier - at that time, OpenAI was revealed to have informed investors that at the current revenue rate, it is expected to generate over $1 billion in revenue within the next 12 months and reach billions of dollars in 2024, significantly higher than industry speculation.

According to other media reports, OpenAI's annual revenue is expected to reach $1.3 billion, with revenue growth exceeding expectations, bringing greater hope for it to turn losses into profits.

To some extent, the combination of equity structure and commercial exploration has ensured the company's rapid progress. For example, since the beginning of the year, OpenAI has successively launched triple charging standards for Plus, Enterprise, and Business versions. Later, in order to increase revenue, it has repeatedly adjusted the GPT-4 access restrictions and adhered to a pragmatic commercial path. As the growth of ChatGPT users has stabilized recently, OpenAI immediately added image interpretation functions to ChatGPT, which is equivalent to exploring a second growth curve.

At the same time, OpenAI's own investment landscape is also growing and expanding. As of September this year, OpenAI's investment fund, Startups Fund, has invested in 7 startups, covering various sub sectors of AI. OpenAIStartups Fund has recently launched an AI native programming tool startup, which is seen as a potential competitor to Microsoft's programming text editor, Visual Studio Code.

From this, it can be seen that its decision to initiate a new tender offer at this moment may imply an intention to adjust its equity structure beyond dividends. However, as a top venture capitalist contender in Silicon Valley, OpenAI has no real exposure to external financing. Since OpenAI accepted Microsoft's $10 billion investment at the beginning of the year, it has only disclosed an external financing of over $300 million in April.

There are reports that it has been carefully selecting the next round of venture capital partners, and Y Combinator, who has worked for OpenAI CEO Sam Altam, is likely to be the first to win. Sun Zhengyi's Softbank is also a popular target.