Five weeks ago, OpenAI, an artificial intelligence lab in San Francisco, released ChatGPT, a chatbot that answers questions in clear, concise prose. The AI-powered tool immediately caused a sensation, with over a million people using it to create everything from poetry to high school term papers to rewriting Queen songs.
Now OpenAI is in the middle of another gold rush.
The lab is in talks to close a deal that would value it at about $29 billion, more than double its 2021 valuation, two people with knowledge of the discussions said. The potential deal — in which OpenAI would sell existing company stock in a so-called takeover bid — could total $300 million, depending on how many employees agree to sell their stock, they said. The company is also in talks with Microsoft — which invested $1 billion in it in 2019 — for additional cash, two people said.
The buzz around OpenAI shows that even in the most dire tech downturn in a generation, Silicon Valley’s deal-making machine is still working. After a humble year of massive layoffs and budget cuts, tech investors — a naturally optimistic bunch — can’t wait to jump on a hot trend.
No field has created more excitement than generative artificial intelligence, the term for technology that can generate text, images, sounds and other media in response to brief prompts. Investors, pundits and journalists have been talking about artificial intelligence for years, but the new wave – the result of more than a decade of research – represents a more powerful and mature type of AI
This type of AI promises to reinvent everything from online search engines like Google to photo and graphics editors like Photoshop to digital assistants like Alexa and Siri. Ultimately, it could provide a new way of interacting with almost all software, allowing people to chat with computers and other devices as if they were chatting with another person.
That has accelerated the closing of deals around generative AI companies. Jasper, a generative AI startup founded in 2021, raised $125 million in October, valued at $1.5 billion. Stability AI, an image-generating company founded in 2020, raised $101 million that same month, valued at $1 billion. Smaller generative AI companies, including Character.AI, Replika, and You.com, have also been flooded with investor interest.
In 2022, investors pumped at least $1.37 billion into generative AI companies in 78 deals, nearly as much as they invested in the previous five years combined, according to data from PitchBook, which tracks financial activity across the industry.
OpenAI’s $29 billion valuation was previously reported by The Wall Street Journal. Venture capital firms Thrive Capital and Founders Fund may buy shares in the takeover bid, two people said. Since OpenAI started out as a not-for-profit company, it’s hard to pinpoint its exact valuation.
OpenAI, Thrive Capital and Founders Fund have not commented on the proposed investment.
Companies have been developing generative AI for years, including tech giants such as Google and Meta, but also ambitious start-ups such as OpenAI. But the technology didn’t catch public attention until last spring, when OpenAI unveiled a system called DALL-E that allowed people to generate photorealistic images simply by describing what they wanted to see.
This inspired entrepreneurs to dive in with new ideas and investors to make far-reaching announcements of disruption. Their enthusiasm reached new heights in December after OpenAI released ChatGPT, with fans leveraging the technology to generate love letters and business plans.
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“It’s the new ‘mobile’ paradigm shift we’ve all been waiting for,” said Niko Bonatsos, an investor with venture capital firm General Catalyst. “Maybe bigger too.”
Investors at Sequoia Capital wrote that generative AI had “the potential to generate trillions of dollars in economic value.” And Lonne Jaffe, an investor at Insight Partners, said, “There’s definitely an element to it that feels like the early launch of the Internet.”
Google, Meta, and other tech giants are hesitant to release generative technologies to the general public because these systems often produce toxic content, including misinformation, hate speech, and images biased against women and people of color. But newer, smaller companies like OpenAI — less concerned with protecting an established corporate brand — are more willing to make the technology public.
The techniques required to build generative AI are well known and freely available through academic research papers and open source software. Google and OpenAI have an advantage because they have access to deep pockets and raw computing power, which are building blocks for the technology.
Yet many top researchers from Google, OpenAI and other leading AI labs have struck out on their own in recent months to create new start-ups in the field. These startups have received some of the largest rounds of funding, with the excitement surrounding ChatGPT and DALL-E prompting venture capital firms to invest in even more young companies.
More than 450 startups are now working on generative AI, according to one venture capital firm’s count. And the madness was compounded by investors’ eagerness to find the next big thing in a bleak environment.
Michael Dempsey, an investor at the venture firm Compound, said the tech downturn — which last year included a crypto crash, underperforming stocks and layoffs at many companies — has caused investors to pause.
Then “everyone got excited about AI,” he said. “People need something to tell their investors or themselves, frankly, that there’s something to be excited about.”
Some worry that the hype around generative AI is getting ahead of reality. The technology has raised thorny ethical questions about how generative AI might affect copyrights and whether the companies should be allowed to use the data that trains their algorithms. Others believe that big tech companies like Google will quickly beat the fledgling upstarts and that some of the new companies have little competitive advantage.
“There are many teams without any AI competency presenting themselves as AI companies,” said Mr. Dempsey.
Those concerns haven’t slowed the wave of excitement, especially after the arrival of Stability AI in October.
The startup had helped fund an open source software project that quickly built image-generating technology much like DALL-E. The difference was that while OpenAI had only shared DALL-E with a small number of testers, the open source version of Stability AI — Stable Diffusion — could be used by anyone. People were quick to use the tool to create photo-realistic images of everything from a medieval knight crying in the rain to Disneyland painted by Van Gogh.
In the ensuing excitement, Eugenia Kuyda, founder and CEO of chatbot start-up Replika, said in an interview that she had been approached by “every VC firm in Silicon Valley,” or more than 30 companies. She took their calls but declined additional funding because her company, founded in 2014, is profitable.
“I feel like the person who arrived at the airport a week early for a flight — and now the flight is boarding,” she said.
Character.AI, another chatbot company, and You.com, which adds chat technology to its Internet search engine, have also been flooded with interest from venture capitalists, the companies said.
Sharif Shameem, an entrepreneur who built a searchable database for images created by Stable Diffusion in August called Lexica, said his tool quickly reached one million users — a sign he should move from his existing start-up to Lexica. Within a few weeks, he raised $5 million in funding for the project.
Mr. Shameem compared the generative AI moment to the arrival of the iPhone and mobile apps. “It feels like one of those rare opportunities,” he said.
Mr. Jaffe of Insight Partners said his firm has since encouraged most of its portfolio companies to consider incorporating generative AI technology into their offerings. “It’s hard to think of a company that couldn’t use it in some way,” he said.
Radical Ventures, a venture capital firm in Toronto, one of the global centers of AI research, was founded five years ago specifically to invest in this type of technology. It recently launched a new $550 million fund for AI, with more than half of its investments in generative AI companies. Now those bets look even better.
“For four and a half years, people thought we were crazy,” says Jordan Jacobs, a partner at Radical. “Now, for the past six months, they thought we were geniuses.”
