OpenAI's Rapid Growth and Financial Challenges: Balancing Innovation with Profitability

Why OpenAI burns through billions

Why it matters: The AI revolution has an astronomical burn rate. OpenAI can't stop fundraising if it wants to keep feeding the fire. Driving the news: The OpenAI round, announced Wednesday, was led by Joshua Kushner's Thrive Capital, joined by Microsoft, Nvidia, SoftBank, Khosla Ventures, Altimeter Capital, Fidelity, Tiger Global and MGX. Apple, which reportedly had been in talks to invest, didn't participate. The intrigue: OpenAI's latest cash haul comes just a little over a year and a half after Microsoft announced it was investing $10 billion in OpenAI over several years. Follow the money: OpenAI needs successive mountains of dollars for three chief purposes. By the numbers: OpenAI expects to bring in $3.7 billion this year, and predicts that number to rise to $11.6 billion next year, per The Times. OpenAI has seen huge growth in usage of ChatGPT since the company in April started giving access to users who haven't set up an account. Between the lines: Software businesses have always benefited from economies of scale -- once you build the product, adding incremental customers brings in revenue without piling up new costs. Our thought bubble: OpenAI's investors aren't contributing to a charity. The company was founded as a nonprofit, but has steadily moved toward a for-profit structure since Altman became CEO in 2019. Microsoft may not need to see a quick return on its dollars, since most of the money it's putting into the company is coming right back to it -- as OpenAI pays the company for its cloud costs.

OpenAI is growing fast and burning through piles of money

OpenAI's monthly revenue hit $300 million in August, up 1,700% since the beginning of 2023, and the company expects about $3.7 billion in annual sales this year, according to financial documents reviewed by The New York Times. OpenAI estimates that its revenue will balloon to $11.6 billion next year.OpenAI, the San Francisco startup behind ChatGPT, has been telling investors that it is making billions from its chatbot and that it expects to make a lot more in the coming years. But it has not been quite so clear about how much it is losing. OpenAI's monthly revenue hit $300 million in August, up 1,700% since the beginning of 2023, and the company expects about $3.7 billion in annual sales this year, according to financial documents reviewed by The New York Times. OpenAI estimates that its revenue will balloon to $11.6 billion next year. But it expects to lose roughly $5 billion this year after paying for costs related to running its services and other expenses such as employee salaries and office rent, according to an analysis by a financial professional who has also reviewed the documents. Those numbers do not include paying out equity-based compensation to employees, among several large expenses not fully explained in the documents. OpenAI has been circulating the documents with potential investors for an investment round that could bring in $7 billion and value the company at $150 billion, among the highest ever for a private tech company. The round, which could close as early as next week, comes at a crucial time for OpenAI, which is experiencing rapid growth but has lost a number of important executives and researchers in the past few months. The documents offer the first detailed look into OpenAI's financial performance and how it is presenting itself to investors, but they do not neatly explain how much money it is losing. The fundraising material also signaled that OpenAI would need to continue raising money over the next year because its expenses grew in tandem with the number of people using its products. OpenAI declined to comment on the documents. OpenAI's revenue in August more than tripled from a year earlier, according to the documents, and about 350 million people -- up from around 100 million in March of this year -- used its services each month as of June. Most of that has come from the continuing popularity of ChatGPT, which was released in November 2022. The documents show a spike in growth after ChatGPT began allowing people to use the service without creating an account or logging in. The company expects ChatGPT to bring in $2.7 billion in revenue this year, up from $700 million in 2023, with $1 billion coming from other businesses using its technology. Roughly 10 million ChatGPT users pay the company a $20 monthly fee, according to the documents. OpenAI expects to raise that price by $2 by the end of the year, and will aggressively raise it to $44 over the next five years, the documents said. More than 1 million third-party developers use OpenAI's technology to power their own services. OpenAI predicts its revenue will hit $100 billion in 2029, which would roughly match the current annual sales of Nestle or Target. Like other high-profile tech startups of the past few decades, OpenAI is struggling to get its costs under control. OpenAI's biggest cost is computing power it gets through a partnership with Microsoft, which is also OpenAI's primary investor. Microsoft has pumped more than $13 billion into the San Francisco company. But OpenAI spends much of that money on Microsoft's cloud computing systems, which host OpenAI's products. In addition to Thrive Capital, the lead investor in the new round, OpenAI is in talks with Microsoft, Apple, Nvidia, Tiger Global and MGX, a technology investment firm controlled by the United Arab Emirates, according to three people familiar with the discussions. OpenAI is offering unusual deal structures to investors. Thrive Capital has invested $750 million into OpenAI's latest round of funding, according to a person familiar with the deal. In addition to putting in its own money, the firm plans to use a financial instrument called a special purpose vehicle to gather an additional $450 million from other investors, the person said. As the deal's lead investor, Thrive also has an unusual perk: the option to invest up to $1 billion more into OpenAI at the same $150 billion valuation through 2025, according to the documents. That could be lucrative to Thrive, given how quickly OpenAI's valuation has escalated to $150 billion, up from just $30 billion a year ago. None of OpenAI's other investors have been granted the same terms, and some of them were frustrated by the special preference, according to two people familiar with those discussions. (The New York Times sued OpenAI and Microsoft in December for copyright infringement of news content related to AI systems.) OpenAI's deal discussions could be affected by three high-profile departures from the company earlier this week. On Wednesday evening, its chief technology officer, Mira Murati, resigned, followed quickly by Bob McGrew, chief research officer, and Barrett Zoph, vice president of research. The funding discussions also come as OpenAI works to restructure itself into a for-profit company. Sam Altman, now the company's CEO, tech kingpin Elon Musk and several other technologists founded the AI research lab in late 2015 as a nonprofit, whose board still maintains control over the company's operations. But in 2018, after Musk and his funding left, Altman transformed the operation into what is a called a capped-profit company, so he could raise the billions of dollars needed to build artificial intelligence. This organization provided a return for investors, but these profits were capped. And it has been governed by a nonprofit board of directors that does not answer to investors. As part of the investment round, OpenAI has two years to convert to a for-profit business, or its funding will convert into debt, according to the deal documents.

OpenAI Is Putting Profits First, Yet It's Bleeding an Astronomical Amount of Money

ChatGPT creator OpenAI is hemorrhaging massive amounts of cash and failing to make up for it in revenue, The New York Times reports. Per the report, OpenAI projected in a document passed around to potential investors that it expects to lose a staggering $5 billion this year -- a figure that eclipses the company's projected year-end revenue of around $3.7 billion. The AI company chalked its sky-high costs up to employee salaries, office rent, and operating costs. Though $5 billion might be an undercount, as OpenAI failed to include noteworthy expenses like equity-based compensation for staffers "among several large expenses not fully explained in the documents," as the NYT put it. The news comes amid turmoil at OpenAI, which last week saw the shock departure of now-former chief technology officer Mira Murati -- the latest in a string of surprising and mysterious exits by high-profile executives -- shortly before OpenAI announced that it would be moving away from its famously nonprofit-driven model. The details of what such a change will entail are unclear. But moving forward, rather than having to defer to its nonprofit board, OpenAI and its CEO Sam Altman will likely have much more control over the direction of the company, its allegedly humanity-benefiting products, and its priorities. But despite putting profits first, the company is likely still many years out from making any profit -- and investors are starting to ask some big questions about whether that will ever change. The documents reviewed by the NYT were handed to potential investors looking to take part in OpenAI's ongoing funding round. The still-private company is hoping to raise upwards of $7 billion, a number that would bring OpenAI's overall value up to an astonishing $150 billion. And yet, OpenAI's long-term revenue model remains murky at best. In the documents, OpenAI reportedly boasted that, as of June, over 350 million people used its products each month. That's an impressive number, sure, but keeping up with operating costs for those users isn't cheap. Only about ten million ChatGPT users cough up 20 bucks for a monthly subscription for access to OpenAI's more advanced models. Given the incredible amount of energy and capital that it takes to power frontier AI models, it's unlikely that any AI company can subsist entirely on subscription fees. And in the meantime, OpenAI will need to keep on bleeding billions of dollars as it builds out the infrastructure needed to sustain these models.

OpenAI sees $5 billion loss in 2024 and soaring sales as big ChapGPT fee hikes planned, report says

Artificial intelligence startup OpenAI expects massive losses this year, but revenue over the next five years will continue to be explosive as the company raises fees on its signature chatbot. According to documents seen by the New York Times, the company expects revenue of $3.7 billion in 2024. ChatGPT, which launched in 2022 and set off the current generative AI frenzy, is expected to generate $2.7 billion this year, while $1 billion will come from other businesses. But OpenAI sees a loss of $5 billion, which doesn't include equity-based compensation, the Times said. Its biggest cost is the computing power it gets from partner and top investor Microsoft, whose cloud services host OpenAI's products. The losses come despite monthly revenue in August hitting $300 million, up 1,700% since the start of 2023, the report added. Growth will continue to soar with OpenAI forecasting revenue will more than triple in 2025 to $11.6 billion and eventually reach $100 billion in 2029. Part of the future revenue gains would come from increases in the fee that ChatGPT users pay. According to the Times, it will rise to $22 per month by year's end from $20 today, then jump to $44 over the next five years. OpenAI declined to comment to the Times and didn't immediately respond to Fortune's request for comment. CNBC separately confirmed the annual revenue and loss forecasts. The documents seen by the Times were shown to potential OpenAI investors as the startup seeks to bring in $7 billion in a fundraising round that could value the company at $150 billion. OpenAI has reportedly been in talks with Microsoft as well as other tech giants like Apple and Nvidia for the funding round, which is expected to wrap up in the coming week.. VC firm Thrive Capital is the lead investor with Tiger Global Management and UAE-backed company MGX also in talks. But sources told the Wall Street Journal that Apple is no longer in talks to participate in the fundraising. Apple didn't immediately respond to a request for comment. Meanwhile, OpenAI is preparing to announce a new structure that will see its for-profit arm no longer subservient to the board of its nonprofit foundation. The sudden resignation of Chief Technology Officer Mira Murati on Wednesday was the latest executive departure that signals OpenAI's coming shift in the wake of the 2023 attempt to oust CEO Sam Altman. Amid the transition to a for-profit business, sources told Bloomberg that OpenAI could grant Altman a 7% equity stake in the company, which could potentially lead to a $10 billion infusion of wealth for the 39-year-old CEO. But the company denied the report. "The board has had discussions about whether it would be beneficial to the company and our mission to have Sam be compensated with equity, but no specific figures have been discussed nor have any decisions been made," Bret Taylor, chairman of OpenAI, said in a statement to Fortune on Friday.

OpenAI funding and restructuring plans renew pressure on AI's top startup

OpenAI is seen as leading the artificial intelligence boom that it triggered with the launch of ChatGPT. Yet in an all-hands meeting Thursday, company executives sought to calm staff worried by the surprise resignation of chief technology officer Mira Murati and departure of two other top leaders -- the latest in a string of senior exits. It was a new example of how OpenAI's rapid ascent has consistently entwined success with turmoil. In addition to addressing the latest departures, executives at the meeting said OpenAI is considering restructuring into a more conventional corporation free from oversight by its nonprofit board, which is pledged to ensure super-intelligent AI benefits all humanity. The maneuver could be legally challenging to complete but make it easier to attract and reward investors. And the meeting took place as OpenAI worked to finalize new investment that would value the company at $150 billion -- about the same as Goldman Sachs -- making a nascent business without profits into one of the most valuable start-ups in Silicon Valley history. The new funding round is expected to provide billions of dollars and to likely include OpenAI's primary existing backer Microsoft, chip maker Nvidia, and investment firm Tiger Global Management. If completed it would help OpenAI keep spending lavishly on tech development. But a giant funding round could also fuel recent antitrust scrutiny of AI deals and concerns from some investors that the immense spending on the technology will be difficult to recoup in the form of profits. Apple was earlier this week also expected to take join the funding round but on Saturday the Wall Street Journal reported it had dropped out of deal talks. Spokespeople for Microsoft, Apple, and Tiger Global did not immediately return requests for comment. Nvidia declined to comment. OpenAI has not disclosed details of the funding or restructuring. The Washington Post's account is based on conversations with four people familiar with company discussions on the condition of anonymity to share internal information. "We remain focused on building AI that benefits everyone, and as we've previously shared we're working with our board to ensure that we're best positioned to succeed in our mission," OpenAI said in a statement. "The nonprofit is core to our mission and will continue to exist." A person close to Murati said her departure was unrelated to the restructuring discussions. "I'm stepping away because I want to create the time and space to do my own exploration," she wrote in a message sent to OpenAI employees and posted on X. As OpenAI has grown from an idealistic nonprofit to a Silicon Valley trendsetter, it has lost most of its founding team; fired and rehired its CEO; drawn multiple lawsuits alleging copyright infringement; and been accused by some employees of skimping safety checks and muzzling whistleblowers. The company's new funding and restructuring plans could lead to fresh drama for a start-up that has already experienced convulsions unusual even for the scrappy tech industry. Attempting to convert from a nonprofit to a fully for-profit business could run afoul of laws governing charities, said Luís Carlos Calderón Gómez, a law professor at the Cardozo School of Law in New York who specializes in nonprofit law. "The law is precisely trying to prevent stuff like this," he said. "It's not going to be easy." Regulators around the world have also become increasingly concerned that investments, partnerships and acquisitions in the swiftly evolving AI sector are squashing competition. The Federal Trade Commission this year opened a study of investments by Microsoft, Amazon and other tech giants into OpenAI and its rival, Anthropic, developer of the chatbot Claude. The Justice Department has been scrutinizing Nvidia's business, and European Union competition commissioner Margrethe Vestager told reporters last week that the bloc had sent questions to the chip maker, a step that could precede a formal investigation into the company. Tech executives and venture capitalists argue that AI is a technological wave akin to the popularization of the internet, the advent of mobile phones, or the move from holding data on regular computers to cloud storage. Huge investment today will ultimately pay off as AI becomes core to everyday life, proponents say. Some AI services have already become popular. OpenAI has said more than 200 million people use ChatGPT every week, some as paid subscribers, and many businesses use the company's technology to power their own products. But the economics of many AI offerings remain unproven. Developing and operating modern AI systems requires highly sought engineers and expensive cloud computing services built on powerful computer chips that consume huge amounts of energy. OpenAI has already raised and spent billions of dollars on AI development and spurred Big Tech partners and rivals to spend billions of their own from cash hoards amassed over the past decade. Kevin Guo, CEO of Hive, which develops AI tools to help social media companies moderate their services, says AI excitement has broken norms established in previous tech waves. "If you look at the companies that went public the last 10 years, they didn't really look like this, they didn't raise billions of dollars a year in private rounds," Guo said. "We're in a really interesting capital climate. There's so much money available." If OpenAI receives funding that values it at $150 billion, it would rank among the most valuable private companies -- far above the heights reached by stars of the 2010s tech boom such as Uber and payments company Stripe, according to data from venture capital research firm PitchBook. One partner at a VC firm that has invested in generative AI start-ups including Anthropic said that while the need for capital to build the technology is clear, expectations for its eventual payoffs can be distorted. "The valuations we're seeing today for AI are becoming a bit stretched," he said, speaking on the condition of anonymity because he was not authorized to comment on the firm's investments. But he also argued the AI market is at the beginning of a growth cycle set to last five to 15 years. "A lot of these companies haven't figured out how to monetize, that's okay," he said. "They're raising more money to buy time to be monetizing." OpenAI could use the breathing space provided by new funding to work on revenue growth, executive retention, and calming internal jitters. But CEO Sam Altman in a staff message this week downplaying the loss of Murati that was also posted to X acknowledged that his company's path is rarely conventional. "Leadership changes are a natural part of companies, especially companies that grow so quickly and are so demanding," he wrote. "I obviously won't pretend it's natural for this one to be so abrupt, but we are not a normal company." Elizabeth Dwoskin contributed to this report.

OpenAI sees $11.6 billion revenue next year, offers Thrive chance to invest again in 2025

Sept 27 (Reuters) - Thrive Capital is investing more than $1 billion of OpenAI's current $6.5 billion fundraising round, and it has a sweetener no other investors are getting: the potential to invest another $1 billion next year at the same valuation if the AI firm hits a revenue goal, people familiar with the matter said on Friday. OpenAI is predicting its revenue will skyrocket to $11.6 billion next year from an estimated $3.7 billion in 2024, the sources said, speaking on condition of anonymity. Losses are expected to be as much as $5 billion this year, depending largely on their spending for computing power that could change, one of the sources added. Advertisement · Scroll to continue The current funding round, which comes in the form of convertible debt, is expected to close by the end of next week and could value OpenAI at $150 billion, cementing its status as one of the most valuable private companies in the world. That valuation depends on pulling off a complicated restructuring to remove the control of its non-profit board and also remove cap on investment return to investors, a plan first reported by Reuters. There is no specific timeline when the conversion could be completed. Advertisement · Scroll to continue Thrive Capital, which also led OpenAI's previous funding round, is offering $1.2 billion from a combination of its own fund and a special purpose vehicle for smaller investors. Other investors on the new round include Microsoft (MSFT.O), opens new tab, Apple (AAPL.O), opens new tab, Nvidia (NVDA.O), opens new tab and Khosla Ventures. The others were not given the option for future investment at current price, sources said. OpenAI's valuation has soared quickly, and if it continues to do so, Thrive could find itself increasing its stake next year at a discounted price. Reuters was not able to determine the revenue target associated with the option for Thrive, which was founded by Joshua Kushner. Thrive and OpenAI declined to comment. OpenAI's revenue expectations far exceed CEO Sam Altman's earlier projection of $1 billion in revenue this year. The main revenue sources are sales of its services to corporations and subscriptions to its chatbot. Its flagship product, ChatGPT, is expected to bring in $2.7 billion in revenue this year, jumping from $700 million in 2023. The chatbot service, which charges a $20 fee every month, has about 10 million paying users. The financials and details about Thrive's additional option were first reported by the New York Times on Friday. Reporting by Krystal Hu and Kenrick Cai in San Fransico; Editing by Will Dunham Our Standards: The Thomson Reuters Trust Principles., opens new tab Krystal Hu Thomson Reuters Krystal reports on venture capital and startups for Reuters. She covers Silicon Valley and beyond through the lens of money and characters, with a focus on growth-stage startups, tech investments and AI. She has previously covered M&A for Reuters, breaking stories on Trump's SPAC and Elon Musk's Twitter financing. Previously, she reported on Amazon for Yahoo Finance, and her investigation of the company's retail practice was cited by lawmakers in Congress. Krystal started a career in journalism by writing about tech and politics in China. She has a master's degree from New York University, and enjoys a scoop of Matcha ice cream as much as getting a scoop at work. Kenrick Cai Thomson Reuters Kenrick Cai is a correspondent for Reuters based in San Francisco. He covers Google, its parent company Alphabet and artificial intelligence. Cai joined Reuters in 2024. He previously worked at Forbes magazine, where he was a staff writer covering venture capital and startups. He received a Best in Business award from the Society for Advancing Business Editing and Writing in 2023. He is a graduate of Duke University.

OpenAI sees $11.6 billion revenue next year, offers Thrive chance to invest again in 2025

(Reuters) - Thrive Capital is investing more than $1 billion of OpenAI's current $6.5 billion fundraising round, and it has a sweetener no other investors are getting: the potential to invest another $1 billion next year at the same valuation if the AI firm hits a revenue goal, people familiar with the matter said on Friday. OpenAI is predicting its revenue will skyrocket to $11.6 billion next year from an estimated $3.7 billion in 2024, the sources said, speaking on condition of anonymity. Losses are expected to be as much as $5 billion this year, depending largely on their spending for computing power that could change, one of the sources added. The current funding round, which comes in the form of convertible debt, is expected to close by the end of next week and could value OpenAI at $150 billion, cementing its status as one of the most valuable private companies in the world. That valuation depends on pulling off a complicated restructuring to remove the control of its non-profit board and also remove cap on investment return to investors, a plan first reported by Reuters. There is no specific timeline when the conversion could be completed. Thrive Capital, which also led OpenAI's previous funding round, is offering $1.2 billion from a combination of its own fund and a special purpose vehicle for smaller investors. Other investors on the new round include Microsoft, Apple, Nvidia and Khosla Ventures. The others were not given the option for future investment at current price, sources said. OpenAI's valuation has soared quickly, and if it continues to do so, Thrive could find itself increasing its stake next year at a discounted price. Reuters was not able to determine the revenue target associated with the option for Thrive, which was founded by Joshua Kushner. Thrive and OpenAI declined to comment. OpenAI's revenue expectations far exceed CEO Sam Altman's earlier projection of $1 billion in revenue this year. The main revenue sources are sales of its services to corporations and subscriptions to its chatbot. Its flagship product, ChatGPT, is expected to bring in $2.7 billion in revenue this year, jumping from $700 million in 2023. The chatbot service, which charges a $20 fee every month, has about 10 million paying users. The financials and details about Thrive's additional option were first reported by the New York Times on Friday. (Reporting by Krystal Hu and Kenrick Cai in San Fransico; Editing by Will Dunham)

OpenAI sees $11.6 billion revenue next year, offers Thrive chance to invest again in 2025

Thrive Capital is investing more than $1 billion of OpenAI's current $6.5 billion fundraising round, and it has a sweetener no other investors are getting: the potential to invest another $1 billion next year at the same valuation if the AI firm hits a revenue goal, people familiar with the matter said on Friday. OpenAI is predicting its revenue will skyrocket to $11.6 billion next year from an estimated $3.7 billion in 2024, the sources said, speaking on condition of anonymity. Losses are expected to be as much as $5 billion this year, depending largely on their spending for computing power that could change, one of the sources added. The current funding round, which comes in the form of convertible debt, is expected to close by the end of next week and could value OpenAI at $150 billion, cementing its status as one of the most valuable private companies in the world. That valuation depends on pulling off a complicated restructuring to remove the control of its non-profit board and also remove cap on investment return to investors, a plan first reported by Reuters. There is no specific timeline when the conversion could be completed. Thrive Capital, which also led OpenAI's previous funding round, is offering $1.2 billion from a combination of its own fund and a special purpose vehicle for smaller investors. Other investors on the new round include Microsoft, Apple , Nvidia and Khosla Ventures. The others were not given the option for future investment at current price, sources said. OpenAI's valuation has soared quickly, and if it continues to do so, Thrive could find itself increasing its stake next year at a discounted price. Reuters was not able to determine the revenue target associated with the option for Thrive, which was founded by Joshua Kushner. Thrive and OpenAI declined to comment. OpenAI's revenue expectations far exceed CEO Sam Altman's earlier projection of $1 billion in revenue this year. The main revenue sources are sales of its services to corporations and subscriptions to its chatbot. Its flagship product, ChatGPT, is expected to bring in $2.7 billion in revenue this year, jumping from $700 million in 2023. The chatbot service, which charges a $20 fee every month, has about 10 million paying users. The financials and details about Thrive's additional option were first reported by the New York Times on Friday.