Microsoft (MSFT, Financial) and OpenAI are currently engaged in discussions about how to distribute profits and shares when OpenAI becomes a profitable entity. The crux of the issue is determining how much equity Microsoft should receive as the largest investor, having poured nearly $14 billion into OpenAI since 2019, especially when earlier investments were made at a significantly lower valuation.
Valuing OpenAI is particularly challenging due to its rapid growth and the potential it holds for the next 5 to 10 years. Columbia Business School professor Angela Lee explains that various evaluation models could lead to discrepancies in valuation by as much as 3 to 5 times. Furthermore, legal compliance and information asymmetry add another layer of complexity.
Currently, OpenAI’s estimated valuation stands at $157 billion, but critics argue this figure might not be accurate. OpenAI's business model has not yet shown a clear path to profitability, with annual losses around $1 billion, further complicated by a sluggish market environment. The potential for antitrust scrutiny also grows with Microsoft's increasing stake.
OpenAI started as a non-profit in 2015 and transformed into a for-profit subsidiary in 2019, attracting substantial investments, including from Microsoft. This shift has led to inherent tensions between the nonprofit and its for-profit arm, culminating in significant boardroom conflicts as recently as 2023. Microsoft's role has changed over time, now holding a non-voting observer position on OpenAI's board.
