Yahoo Finance

OpenAI confirming it's getting a $4 billion credit line on top of its latest funding round that gave the company a $157 billion valuation. The funding round including investors Thrive Capital, Microsoft, Nvidia, SoftBank, and much more. OpenAI reportedly asking these investors not to fund some of its competitors including Anthropic and Elon Musk's XAI. That's according to report out from Reuters. We want to bring in Sultan Meghji. He is the co-founder and CEO of Frontier Foundry. He's also the former chief innovation officer at the FDIC. It's great to have you here on Yahoo Finance with us. So, talk to me just about the sheer valuation of this company, $157 billion. What do you make of that, and what does that signal here for the future growth of OpenAI?

Well, it's, I mean, it's the largest private funding round in history. It's a massive valuation, and you know, if you're a VC, and you're doing the math on this, it's, you know, rough order of magnitude, two to three times what their actual revenue would support. And so there's a lot of energy behind it, a lot of emotion behind it. But, like has been reported, and what you just commented on, there are a bunch of the investors in this round who are looking for them to really get their revenue higher. You know, I would have expected to get the kind of revenue they have now, to be, you know, basically double to support the kind of the kind of revenue or the kind of valuation they're getting, but it does put a lot of pressure on them, especially with all these staff departures that they've had recently. And it's frankly going to take a lot of energy for them to get there.

How critical was it for OpenAI to say that they were willing to and were exploring and are planning to change to a for-profit status in order to lure in some of these new investors?

We don't know the full extent of that, but it was absolutely required. We know multiple investors required it, and multiple investors also are saying that they have to hit revenue targets to come back. And so this is a real reset for OpenAI. They are now aimed at being a massive artificial intelligence product company. Everything else becomes secondary, and we've seen that just in the last week or two with a couple of more recent product announcements. And we're going to start seeing them have a far stronger focus on revenue, especially enterprise revenue.

Sultan, when you talk about some of the capital spending that's going on right now, there's lots of questions I think about the rate at which OpenAI is burning money, why they're burning money, quote-unquote, burning money, at such a fast rate. Can you give us any insight just about what this stage of OpenAI looks like inside their walls, and why it is that we see that cash burn rate so high?

Yeah, so it's a great question. You know, they, you know, they were coming into this fundraising with, I think it was about a $5 billion shortfall, and so they really needed to get this fundraising done. And it's because they're spending a bunch of money in a couple of key areas. The first is around regulatory management. You know, there aren't a lot of regulations here in the United States. They are spending a tremendous amount of money on lobbying to help shape AI regulation. They're also spending a huge amount of money on people, similarly to companies like Scale AI, which are using a huge number of people to manually do data management work. And then, you know, finally, they're really trying to build revenue and justify the valuation. You know, they're on a clock now, and it's not clear if it's a 12-month clock or a 36-month clock in order to justify the kinds of numbers that we're hearing. You know, if Apple only had, you know, three and a half billion in revenue, we would not call it a trillion dollar company. OpenAI wants to be a trillion dollar company, and they are going to spend as much money as they can as quickly as possible to get there.

Is this a company that is marching toward some type of legal action on the antitrust front, given that they're telling investors that, hey, they can't engage with XAI, of course, of Elon Musk fame, and then Anthropic of Amazon fame.

Yeah. It's it is a huge question here in DC. You know, even before we saw the investor list for this most recent round, there were a lot of concerns about just how massive and how overwhelming OpenAI already could be in terms of its competitive pressure, just because they spend so much money buying, buying up people. And it's, I think, especially if you look at Nvidia, you look at Microsoft, you look at SoftBank, and you look at Thrive, which led this round. These are all companies that are, that are key to the current generative AI ecosystem. And there are really two categories of AI firms out there right now. They're the ones that are five, six, seven years old, like OpenAI, and then there are the ones that are less than 24 months old, and not being able to invest in the more modern technologies of the newer companies, I think it's raising a lot of eyebrows on the antitrust side.

Sultan, what do you think OpenAI is going to look like five, 10 years from now?

That is an absolutely fantastic question. Um, you know, there are really three possible outcomes. Number one is, they are in that rarified category of the biggest of big tech, you know, like a Microsoft, an Apple, a Meta, an Alphabet, and it is just a key component of artificial intelligence. There is a second option where some degree of M&A activity occurs, and you know, you see them get bought by an Apple, or you get them bought by Microsoft or whomever, or you see somebody try to put Nvidia and OpenAI together, which I think would certainly trigger antitrust here in the United States. Um, and the third is, that just like in the 90s and in the 2000s, whether we're talking about first-generation e-commerce and internet, and internet search, or we're talking about cloud, you know, the Ask Jeeves and AltaVistas, big, massive companies, then kind of disappeared after five years. AOL is another example of that. One of those three things will happen with OpenAI. It's just a matter of will they be able to execute well enough and build a product that can get to the kind of enterprise revenue they need. So being able to operate in secure enterprise environments, to get to the kind of dollars that Microsoft gets on a daily basis.

Sultan, always a great pleasure to grab some of your insights here with us. Sultan Meghji, who is the Frontier Foundry co-founder and CEO. Appreciate it.

Thanks for having me.