OpenAI employees have initiated a plan to sell $1.5 billion worth of shares to SoftBank’s Vision Fund 2, marking a significant deepening of the Japanese conglomerate’s stake in one of the AI industry’s most valuable companies.
According to CNBC, the tender offer, which values OpenAI at $157 billion following its October funding round, provides much-needed liquidity for employees while bolstering the company’s financial reserves. The deal, finalized amid escalating competition and financial pressures, underscores SoftBank’s strategic push into artificial intelligence.
Employees must decide by December 24 whether to participate in the tender, making this a key moment for both OpenAI and its workforce.
Irrational Investment or Smart Move?
Softbank CFO Navneet Govil, when asked about the assumed high valuation underlying the investment in OpenAI in Softbank´s FY24Q2 Global Conference Call, explained their rationale with the following words:
“OpenAI has a clear roadmap for growth and an eventual IPO. It fits very well in terms of the Vision Fund 2 strategy. As you know, we are late-stage growth equity investors. We take minority stakes that are more financial returns driven rather than a platform strategy driven. That is why it made a lot of sense for investment in OpenAI to sit in Vision Fund 2.
Now, specifically, in terms of your question on valuation, I will share a couple of statistics
with you.
It is the fastest consumer app to reach 100 million users. It did so in two months. And it now has 350 million monthly active users, which is significantly higher than competitors. For example, Anthropic has 70 million users. Google Gemini has 300 million users. And then, if you look at its revenues, it scaled from $28 million in revenues to $3.7 billion in revenues in less than two years. When we look at it in terms of multiples, forward revenue multiples are now in low-mid teens.
It is about 12.5 times based on expected 2025 revenues. This is in line with high-growth SaaS companies. It is on track for approximately $4 billion of revenues in 2024, of which more than 70% are recurring revenues compared to the next largest competitor, which is Anthropic with about $1 billion in revenues. So hopefully, that gives you a sense of how we look at the valuation and why we believe it makes sense for it to be in Vision Fund 2.”
Masayoshi Son, SoftBank’s CEO, has been vocal about his ambition to position the conglomerate at the forefront of AI innovation, describing this investment as a key step toward achieving long-term dominance in the sector.
OpenAI’s Financial Challenges and Strategic Adjustments
The tender offer comes amid fierce competition between OpenAI and Google, two giants battling for dominance in the generative AI market. Both the ChatGPT-Maker and Google are currently reading major product releases.
OpenAI is currently finishing work on its next major model, Orion, about to launch a multi-step AI agent, and even considering to launch an AI focused web-browser to compete with Chrome. Meanwhile, Google is working on an own agent called Jarvis and pushing AI benchmark leadership with experimental releases of its Gemini model.
OpenAI is also pursuing an aggressive hardware strategy to mitigate costs. Partnerships with TSMC and Broadcom aim to develop custom AI chips by 2026.
Behind the scenes of Softbank´s tender offer lies a company grappling with the immense costs of leading the AI frontier. OpenAI projects losses of $5 billion for 2024, with cumulative losses expected to reach $44 billion by 2028. Training and operational expenses for advanced models like GPT-4o account for much of this financial strain. By 2026, annual compute expenditures are anticipated to climb to $9.5 billion.
Despite its financial challenges, OpenAI maintains over $10 billion in liquidity, secured through investments from Microsoft and other major backers. However, profitability remains a distant goal, with forecasts suggesting no positive earnings until at least 2029.
SoftBank’s $1.5 billion investment in OpenAI, valuing the company at an astonishing $157 billion, seems excessively optimistic even in today’s market. While OpenAI has shown impressive growth, such a high valuation hinges on the assumption that this trajectory is sustainable amidst fierce competition and potential market saturation. The AI industry is rapidly evolving, and betting on projections that may not materialize poses significant risks.
Moreover, comparing OpenAI’s revenue multiples to high-growth SaaS companies may overlook the unique challenges inherent in the AI sector, such as ethical concerns and regulatory uncertainties. The reliance on recurring revenues is positive but may not fully offset the potential for abrupt shifts in technology or consumer preferences that could impact profitability.
Leadership Turnover and Legal Battles
Compounding its financial challenges, OpenAI has experienced notable leadership changes in recent months. CTO Mira Murati and Research Chief Bob McGrew exited the organization in 2024, while co-founder Greg Brockman returned after a brief hiatus. These shifts have raised concerns about OpenAI’s ability to maintain stability during a critical growth phase.
Meanwhile, Elon Musk’s legal battle against OpenAI continues to draw attention. Musk’s lawsuit accuses OpenAI of abandoning its nonprofit mission in favor of profit-driven motives and alleges undue influence by Microsoft, which has invested nearly $14 billion into the company.
The lawsuit also challenges OpenAI’s capped-profit model, which was introduced in 2019 to attract investors while retaining elements of its original mission. Critics, including Musk, argue that this structural shift compromises the organization’s ethical foundation, further intensifying debates about the balance between innovation and responsibility.
