Burn money and lose billions

One of the big questions surrounding artificial intelligence is whether and when the people running these organizations will be able to show profits from their efforts and products.

It is an important challenge for the AI ​​world. Billions are being spent on AI development and products worldwide. The technology is considered the most important technological development since the emergence of the Internet in the 1990s.

The short answer might be: not many, at least not yet.

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Take Open AI, the San Francisco-based startup behind ChatGPT. The organization is slowly transforming from a non-profit organization to a for-profit company.

However, there is still no talk of profits.

According to the New York Times, Open AI generated $300 million in monthly revenue in August, no small number, and is up 1,700% since the start of 2023.

Financial documents examined by The Times suggest revenue could reach $3.7 billion in 2024 and potentially reach $11.6 billion in 2025.

And here’s the but: Open AI expects to lose about $5 billion this year alone. Many standalone companies are still in the process of developing an addressable and profitable market for their offerings

To transform itself into a for-profit company, Open AI is now seeking to raise about $6.5 billion to $7 billion in new capital, a process that could value the company at about $150 billion — “one of the highest.” “ever achieved for a private technology company”. ” noted the Times.

Open AI CEO Sam Altman, co-founder of the company, could end up with a huge equity stake and become a billionaire.

The fundraising is being led by Thrive Capital, a venture capital firm founded by Joshua Kushner, whose brother Jared is Donald Trump’s son-in-law.

Ultimately, the company wants to be a “public venture company”. The structure allows a company to explicitly express its intention to have a positive impact on society.

Most companies don’t make this a goal and focus primarily on increasing shareholder wealth.

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It is not clear when or if a public offering of Open AI securities might take place. And chances are that won’t happen until the financials are clearer.

Many big names are now putting money into the Open AI fundraising campaign, including Microsoft (MSFT) Nvidia (NVDA) Tiger Global and others. Apple (AAPL) had agreed to invest in the offering but pulled out, the Wall Street Journal reported Friday.

The story continues

Microsoft has reportedly committed $1 billion to the offering, in addition to the $13 billion already invested in Open AI.

A revolution in technology

Jensen Huang, CEO of Nvidia, likes to say that AI and the development of chips and systems for AI are part of a new industrial revolution.

In June, Cohere, a Toronto-based AI startup, raised $500 million from companies including Cisco Systems (CSCO) Advanced micro devices (AMD) and Japanese electronics giant Fujitsu.

That corresponded to a valuation of around $5.5 billion. At the time, the company was generating just $35 million in annual revenue.

Wall Street is more cautious about AI

AI may be revolutionary, as Jensen Huang says, but revolutions in business often lead to a large number of corporate restructurings and outright failures before a profitable model emerges.

And even internal volatility.

At Open AI, several top managers have resigned this year alone.

Technology chief Mira Murati announced last week that she was leaving the company after six and a half years. Bob McGrew, OpenAI’s chief research officer, and Barret Zoph, vice president of research, also announced their resignations from the company.

The departures come four months after OpenAI co-founder and former chief scientist Ilya Sutskever also resigned.

Therefore, it should come as no surprise that investors seem to be at least a little more skeptical, perhaps just more realistic, about Open AI and, for that matter, AI in general.

The AI ​​story generated ominous hype in 2023 and 2024 through late June and early July.

Nvidia was actually up 184.2% this year, peaking at $140.76 on June 20. Shares have fallen 13.8% since then. On the year, the gain is still a whopping 145%, but shares are up just 1.3% with only one trading day left in September and 2% in August after a 5.3% decline in July.

Microsoft gained 56.8% in 2023 as the AI ​​frenzy gained strength, and rose 24.8% as the company peaked at $468.35 on July 5. Shares have fallen 8.6% since then.

AI is new. You can buy shares of AI companies when they go public. You can buy into an ETF focused on AI, such as Cathie Wood’s Ark Innovation ARK Innovation ETF (ARKK) . But be aware that these are very volatile vehicles and the likelihood of losses is high.

Companies with longer track records and good balance sheets could be a conservative route.

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