The Bear Case for OpenAI at $157 Billion
Analyzing OpenAI's $157 billion valuation
After more than a decade covering startup unicorns, the “oh my god investors are crazy; how could it be worth that?” story is a bit tired for me.
I covered the ins and outs of Uber for many years and was one of the main reporters writing SCOOP Uber lost billions of dollars last year. Is this sustainable?
We all watched WeWork, GoPuff, Bird, and others raise shocking amounts of money with high burn rates and prove the skeptics right. But others, like Uber, figured out how to turn their big business into a profitable one.
OpenAI’s latest fundraising round poses so many big questions that I couldn’t help but dig into the business.
Is OpenAI a good investment at a jaw-dropping $157 billion valuation? Is it an even bigger and better Uber? Or is it more like a WeWork? I’ve been talking to Silicon Valley investors and poring through the reporting. I’ll make my case for why I think new investors are making a mistake investing in this round.
Less than a year ago, I too was bullish on OpenAI. When we held a draft of unicorn AI startups at our Cerebral Valley AI Summit, I took a $75 billion handicap for the right to pick OpenAI first. There’s a lot of value in being the leader.
Since then OpenAI’s valuation has soared from $86 billion to $157 billion after the latest $6.6 billion funding round.
The Abridged Bull Case
Let’s start out with the bull case. I saw OpenAI investor Brad Gerstner deliver one version of it last week at Madrona’s IA Summit. Gerstner’s firm, Altimeter, was one of a number of investors, including Thrive, SoftBank, Tiger Global, Fidelity, Khosla Ventures, and MGX, to invest in this latest funding round.
Gerstner’s pitch goes like this: OpenAI is growing its revenue faster than Google and Facebook did in their early years. ChatGPT is the second-ranked iPhone app right now and is expected to bring in $2.7 billion in revenue this year, out of $3.7 billion in total company revenue, according to the New York Times.
OpenAI is valuable because it is able to turn its foundation model technology into a widely popular consumer and enterprise application. Technology alone wouldn’t justify the valuation. There were other search companies but Google agglomerated all the value by taking a big lead. This is a bet on ChatGPT and OpenAI’s ability to build real products.
OpenAI has 250 million weekly active users without much marketing spending, which is double an estimate of Google’s actives at the time of its IPO, Gerstner said.
OpenAI has forecasted $11.6 billion in revenue next year, meaning that it’s $157 billion valuation is a 13.5x multiple on forward revenue. That’s not exactly crazy. Investors set Facebook’s IPO price at a 13x revenue multiple to the next year’s $7.8 billion in revenue.
OpenAI has the most popular AI app and the best foundation model. It’s got the generational leader in Sam Altman. It’s got a money cannon behind it and a deep partnership with Microsoft. What’s not to love?