When Microsoft invested $1 billion in OpenAI in 2019, it was weird. Now, the bet looks like one of the smartest investments in technology history.
OpenAI announced last week that it’s restructuring itself into a for-profit public benefit corporation. The move will create traditional stock that enables investors to get equity stakes in the business.
As part of this, Microsoft will likely get a new equity stake in OpenAI that could be worth at least $150 billion, according to analysts at BNP Paribas and other estimates.
Microsoft invested about $13 billion to acquire this stake, including the initial $1 billion and a bigger investment in early 2023, soon after ChatGPT came out.
Returns rivaling the best
If the restructuring happens as planned, Microsoft would receive a more than tenfold return in just a few years, rivaling other famously successful investments by Big Tech companies.
For instance, Google bought YouTube for $1.65 billion in 2006. The video site is now worth hundreds of billions of dollars as part of Google’s broader internet business. Facebook acquired Instagram for $1 billion in 2012. This asset is worth hundreds of billions of dollars now, too.
These two investments took more than a decade to play out, whereas Microsoft’s return on its OpenAI investments has grown much more quickly.
Satya, Kevin, and Sam
Microsoft CEO Satya Nadella, CTO Kevin Scott, and OpenAI CEO Sam Altman crafted the original partnership. It involved unusual profit-sharing units in what was essentially a research lab wrapped in a charity at the time.
OpenAI also got credits to use Microsoft’s Azure cloud service to train and run the giant AI models that power ChatGPT and the startup’s other offerings.
After ChatGPT took off, OpenAI needed even more money to purchase computing power and other resources to support this unprecedented growth. New investors have wanted traditional equity stakes in return for their cash, and OpenAI has said that its unusual structure posed challenges in fundraising from investors.
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This pressure forced OpenAI to rethink its corporate structure and renegotiate its partnership with Microsoft. While that process has been somewhat acrimonious, the two tech giants seem close to resolving their differences now.
The result is a potential win-win: Microsoft gets a massive new equity stake, and OpenAI can issue traditional stock, which will help it raise even more funding.
“The OpenAI relationship, and the uncertainty around it, has almost been viewed as a liability for Microsoft, rather than a valuable asset,” BNP Paribas equity analyst Stefan Slowinski wrote in a recent note to clients. “That is set to change as details become available.”
A stake worth $150 billion or more
In negotiations, the tech companies have discussed Microsoft getting about a third of the new equity. Meanwhile, OpenAI employees are selling stock in a new round that values the startup at $500 billion.
“There are reports Microsoft will have a ~30% stake. This would add $150 billion to Microsoft’s valuation,” BNP’s Slowinski wrote.
If the stake is 33%, this would be worth even more for Microsoft, based on a $500 billion valuation for OpenAI.
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