The Meaning of OpenAI’s $150 Billion Valuation

Plus, what happened when Nevada turned to AI for help

Ric Edelman: It's Monday, November 18th. Today, we are going to discuss OpenAI.

OpenAI, you know the drill, that's the maker of ChatGPT, and they are now raising money to build their business, and they're valuing their company at $150 billion. This is a company that didn't exist a few years ago, and it's suddenly worth $150 billion or more. This is only the second time a startup has gotten a valuation of $100 billion or more.

The other one? SpaceX, created by Elon Musk. This notion, a brand-new startup venture, being valued at this kind of number is turning Silicon Valley on its head. Where are they going to get all that money? Why does the company need so much money? How are investors going to make any money?

Well, let's tackle these. First is getting the money. The average venture capitalist, you know, they're a VC. And the funds are called venture capital funds. Investors invest in these funds. These funds go out and dole out money to young startups. You look at a thousand startups. You consider 50 of them. You invest in one of them.

And you do this until you have invested in a hundred of them, which means you're considering thousands of young startups to invest in a couple of dozen of them. You’re hoping that for every 10 startups you invest in, seven of them are going to go broke…it’s a great idea, but poor execution, or they couldn't make it happen and your investments worthless.

Of the remaining three, you get your money back out of two of them. And one of them you're hoping hits a home run to justify the losses you incurred on the other nine. In other words, you're hoping that out of this huge array of companies you're investing in, one of them will become the next Uber or Facebook or Google or Apple or whatever. Or ChatGPT.

This is why venture capitalists are dealing with very high risk ventures and why, if you're going to be successful, you need to invest in a whole lot of these companies. If you invest in one or two, that's a huge gamble. You’ve got to invest in a whole lot of them over a long period of time.

Anyway, think about this. These young startups get their money from venture capitalists. Well, the typical venture capital fund only has about $150 million on average. That's 1 percent of what OpenAI says they're worth. So, they're not going to, if they need all this money, they're not going to get it from VCs because VCs don't have enough cash.

So, who does, who's got the tens of billions of dollars that OpenAI is looking for? We're talking about Microsoft, Amazon, Apple, Google. In fact, Microsoft has already invested $13 billion into OpenAI. These giant tech companies have massive amounts of money that they can invest. And in fact, they can also provide ChatGPT OpenAI with a lot more than just money.  Amazon's cloud services business for example, they can help open AI train its LLMs, the large language models that make ChatGPT work. Apple could use it’s app store platform to help OpenAI sell its products and so on.

And then there's the rest of Wall Street. Lots of big institutional investors, endowments, pension funds, insurance companies and such, sovereign wealth funds.

They've got lots of money to invest, trillions. So you add it all up, a lot of them are going to find this investment opportunity pretty appealing. So, this is where the money is going to come from. The big are going to get bigger. And the company needs all this money because it takes a massive amount of computing power to make AI work.

A report from Wharton just came out and says that in 2022, when ChatGPT was first introduced, it cost less than $10 million to make it work. In other words, all the people who were sending in all those queries in the early days, it cost $10 million to make ChatGPT work for everybody. Now it costs $100 million. And that's because it's getting better and better at its computational power. And as it’s computational abilities get better, its power consumption grows exponentially. Wharton says by the end of the decade, it's going to cost $10 billion dollars to power just one of these AIs.

Let me give you an example for this. This one is pretty commonly talked about in AI circles. If you ask ChatGPT, how many Rs are there in strawberry? It'll immediately say two. but the newer version of ChatGPT will give you the correct answer. Three, because the additional computational power will allow the AI to be more thoughtful.

Yeah, you were fooled too by my question. When I asked you how many R's are there in strawberry, I bet you said two, but if you slow down and you think about it further and you actually spell out the word, you realize there's a third R and that's what the new ChatGPT does. It goes more in depth, more thoughtful, more considered as opposed to a quick, spurred answer.

So great, the company's worth a lot of money. It's going to get that money from big institutional investors and tech companies, and it needs the money because it needs computational power. And it's going to build more computer systems to be able to do all of that. Fine.

But the third question, how's it going to make any money for those investors? This is the key thing. I mean, ChatGPT is a big deal, but it's been really almost two years now. What do we have to show for it? From an investment return, not a whole lot. ChatGPT is not curing cancer. It's not plotting pathways to Mars. It's not solving the world's hunger crisis.

So, the AI has got to get a whole lot bigger. It's got to get a whole lot more powerful in order for it to really achieve some truly amazing stuff. But if it does manage to pull that stuff off and those discoveries, those solutions to global problems are going to turn the early investors into into trillionaires. In the meantime, none of this is a sure thing. And this means that those investors, instead of becoming trillionaires, could end up getting wiped out. And part of the reason for this is that even if the AI ends up working, we might not want it to work.

Let me give you an example of what I'm talking about. There was a big controversy in the state of Nevada recently. It used AI to answer a really important problem they were facing in Nevada. Which of our school children need help? Which of our children in our Nevada schools are at risk of falling behind. Might even drop out of school. This is a pretty simple question, but it's a pretty important one. What it comes down to, according to the state, is how should the state of Nevada spend its education dollars? On which schools and for which students?

So, they hired an AI system to do this. The AI went through a massive amount of data on Nevada's schools students that looked at their grades, their unexcused absences, their discipline history, lots of other data. Like how often do their parents log into the school portal.  That gives them an idea of how engaged their parents are.  And how many parents are there in the household? Because they know there's a difference in upbringing when you have a two-parent household versus a one-parent household. Which language is spoken at home? Because, you know, English literacy has a big impact on how well the student does in school. And what about the student's race and gender and fact, what country was the child born in?

You know, that might seem like an odd question, but in Nevada, 20% of its residents that speak English were not born in the United States. They're immigrants. So, if these children are not native born in the U.S. that means they're not native English speakers in the U.S. And that culturally, as they're trying to fit in, as well as phonetically dealing with language, these could be different challenges.

All told the AI looked at about 150 different separate data points. And it then gave each of those data points a weighting and in the end, produced its answer. And it said that the state's prior estimate that the state of Nevada had been relying on regarding how many kids are struggling in school, the AI said the state was wrong. That it had way overblown the problem.

That the state had said there were 270,000 at risk youth. And the AI said, nonsense, there are only 65,000. That's 75% fewer at-risk kids than what the state thought. And so, the state rejiggered its budget based on the new data, and the result? A whole bunch of schools across the state were suddenly getting a whole lot less money from the state than they were before.

Local school districts suddenly had to scramble. They had to cut their budgets, they had to cancel programs, you name it. You want to guess what the reaction of the local parents was to all of this? When the state said they made all these budget cuts and these reallocations because of something that AI told them to do? Yeah.

So, AI is really capturing our attention, our imagination. There's no doubt in the future, long term, our world's going to be relying on AI for pretty much everything. But in the short term, getting from here to there, it's going to take a lot of time. It's going to take a lot of money to get us there.

And nobody's really sure yet which of these companies is going to be the winner. Is the company that produced the AI that Nevada used going to stay in business after this outcry? You know, is OpenAI going to be the AI provider, the way Apple is the smartphone provider? You know, this is the real question that we're going to be facing and are we going to be happy with how AI is dictating to us how we should be living?

These are pretty fundamental questions. So, pretty exciting news that OpenAI says it's worth $150 billion and that it's raising all kinds of money from all kinds of companies and investors. Is it going to work out the way everybody's hoping? Stay tuned.

If you like what you're hearing, be sure to follow and subscribe to the show, wherever you get your podcasts, Apple, Spotify, YouTube, and remember leave a review on Apple podcasts. I read them all. Never miss an episode of The Truth About Your Future. Follow and subscribe on your favorite podcast app.  

I'll see you tomorrow.

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