OpenAI, the creator of ChatGPT, has raised $6.6 billion from investors valuing the company at $157 billion, nearly twice its previous valuation. While a section of the market believes that artificial intelligence (AI) companies are now in a bubble zone, OpenAI has been defying such chatter with every successive funding round.

The most recent funding round was led by Thrive Capital which has put $1.25 billion into the company. Tiger Global, Microsoft, and Nvidia are among the companies that participated in the funding round as companies scramble to grab a pie of the hot AI startup.

“The new funding will allow us to double down on our leadership in frontier AI research, increase compute capacity, and continue building tools that help people solve hard problems,” said OpenAI on the funding in its blog.

OpenAI Raises Funds at $157 Billion Valuation

Notably, Microsoft has vowed to invest billions of dollars into OpenAI over a multi-year period as it tries to enhance its AI capabilities with both organic and inorganic investments. The company has reportedly invested just under $1 billion in this funding round.

Cathie Wood’s Ark Investment Management and Altimeter Capital have also reportedly put in $250 million each. Apple was also reportedly in discussion about investing in OpenAI but the company eventually decided against it. Nevertheless, it is working on integrating ChatGPT into its AI-powered iPhone 16.

The $6.6 billion funding is one of the biggest in the private company space. However, raising money hasn’t been much of a trouble for quality AI companies even when there was a “funding winter” for other startups.

Investors have their purse strings wide open for AI companies and BlackRock has launched a new fund along with other companies and plans to raise up to $100 billion for investing in AI infrastructure. Incidentally, Abu Dhabi-backed investment outfit MGX, which partnered with BlackRock for the Global AI Infrastructure Investment Partnership (GAIIP) has also invested in OpenAI’s current funding round.

OpenAI’s post-money valuation of $157 billion is nearly twice what it was valued at earlier this year. Also, the valuation is over five times the $29 billion that the ChatGPT parent was valued at in the 2023 funding round.

While the valuations might sound ludicrously high (and they are), AI companies have been able to command a massive premium given the euphoria over the technology.

For instance, earlier this year, Elon Musk’s AI startup xAI raised $6 billion at a mammoth $24 billion valuation which would appear even more frothy given that it is a much newer entrant in the AI space that hasn’t proved itself whatsoever yet.

Funding Is Subject to Change in Business Structure

Meanwhile, investors in OpenAI’s current funding round will have the option to take back their money if the company does not restructure as a for-profit company within two years.

OpenAI is reportedly considering making its core business into a for-profit benefit corporation and while the OpenAI non-profit will continue to exist and also own a minority stake in the for-profit company, its board won’t control the new for-profit company. The restructuring would make OpenAI even more attractive to potential investors – not that it is unattractive under the current structure.

OpenAI kept a 100x profit cap for investors which it said was to “incentivize them to research, develop, and deploy AGI in a way that balances commerciality with safety and sustainability, rather than focusing on pure profit-maximization.” This cap was rather ridiculous anyway as it was a massive cap on an already valuable company. For example, Microsoft could return about $1 trillion dollars on its $10 billion investment before reaching the cap.

That said, by becoming a for-profit company, OpenAI would give away its pretense of existing just for the social good and can then work towards maximizing returns for its stakeholders.

Developing AI Infrastructure Requires Massive Capex

Developing data centers and large language models (LLMs) is incredibly expensive, including buying graphic processing units (GPUs). Nvidia has been minting money selling the world’s best AI training chips and the company is expected to post revenues of over $125 billion in the current fiscal year – over 11x what it did in the fiscal year 2021.

While Nvidia’s revenues and profits have soared selling GPUs, other AI companies are either incurring massive losses or else figuring out how to effectively monetize their AI capex. Like most speculative gold rushes, the people selling the shovels and pickaxes often make the most money.

OpenAI has been posting absolutely massive losses and is expected to lose $5 billion in 2024 on revenues of $3.7 billion. That said, while the company’s losses have been widening, its revenues are also growing at a brisk pace with sales expected to more than triple to $11.6 billion in 2025.

OpenAI’s CEO Sam Altman believes that the company will need to raise $100 billion as it strives to achieve “artificial general intelligence” – a theoretical AI model with human-like intelligence that can learn and improve itself. If that number sounds outrageous, it gets worse. Altman was also reportedly in talks with global investors to raise $7 trillion to expand the chipmaking facility to meet the growing demand from the AI industry.

OpenAI Asks Its Investors to Not Back Five Other AI Startups

Reportedly, along with the money, OpenAI has also sought commitments from investors that they won’t back five competing AI startups. These include OpenAI’s co-founder Ilya Sutskever’s Safe Superintelligence (SSI), Musk’s xAI, AI search startup Perplexity, enterprise search firm Glean, and Anthropic (the maker of Claude).

While none of these companies have responded to these reports, Musk labeled OpenAI as “evil” for blocking funding for other AI companies. Musk has often lashed out at OpenAI and in August revived his lawsuit against the company and its CEO Sam Altman alleging the company put profits ahead of the public good which wasn’t its initial goal.

https://x.com/elonmusk/status/1841592690678317368

The world’s richest person has good reason to be upset as he donated tens of millions of dollars to OpenAI before it shifted to a non-profit (meaning that he got absolutely nothing for his money while later investors are raking in comical amounts of cash).

Valuations of AI Companies Signal a Bubble to Some

The valuations of AI companies have gone through the roof as is illustrated by OpenAI’s value doubling within 2024. Naturally, analysts are looking at these valuations and comparing them with returns on AI products and most don’t like what they see, ringing alarm bells about a potential bubble. To be sure, barring chip companies – predominantly Nvidia and its supplier Taiwan Semiconductor Manufacturing Company – not many companies have many if any tangible benefits to show from the countless billions of dollars spent on AI.

Revenues of companies creating AI products like Microsoft and Alphabet aren’t taking off in a big way despite the massive investments that they are making in AI. Even sales of Apple’s iPhone 16 which was expected to lead to a supercycle amid the AI-powered features, haven’t been as strong going by the initial reports.

All said, investors seem to overlook all the concerns and are willing to pay massive premiums for quality AI companies – at least that’s something that OpenAI’s latest funding round tells us.