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More Magic Math from OpenAI?
When it comes to OpenAI, smart money is starting to do the math out loud. And something doesn’t add up. On surface, today’s news that OpenAI is offering 17.5% guaranteed returns to private equity firms looks like a shot at the Anthropic threat. Scratch the surface, and you start to see the story behind the story.
The PE deal is the kind of deal you do when you’ve borrowed against the future and the future is taking longer than expected.
Remember a few weeks ago when Nvidia CEO Jensen Huang (one of the backers of OpenAI) said that OpenAI was not a well-run business. Now Thoma Bravo founder Orlando Bravo is saying it out loud. Bravo walked away from the JV idea after questioning the long-term profit profile. It is not a coincidence that two smart money operators are arriving at the same conclusion. Just different words.
As I wrote in yesterday’s newsletter, (and in my breakdown of Nvidia GTC, Jensen’s Trillion Dollar Token Factory, for CrazyStupidTech) we are at an inference inflection. What that means is that AI goes from being in the “capex” phase to being in the “opex” phase. That shift is why you see Anthropic adding a billion or so in revenue every week or so. And that is why OpenAI is in a tizzy. And that is why Elon Musk has made “coding” a top priority for his Grok. All three companies are about “business” and revenues and not just promises.
OpenAI is good at promises. Especially the promises of a limitless future. And it has done a good job of borrowing against that future. Except, that future isn’t arriving or arriving fast enough.
It announced the $110 billion funding round, while only about $25 billion was near-term committed capital. Stargate was a $500 billion infrastructure promise. Oops. Each of these moments followed the same logic. Project confidence so large that the world treats it as reality. The reported PE deal is just the latest version of the same story.
The question to ask is why is OpenAI willing to guarantee 17.5 percent return? What gives. My harsh read of the situation is that the company needs money, and private equity is the last large pool of capital it can tap. And that tells you something about how many other doors OpenAI has already knocked on.
Here I go again with more questions than answers.
When I look at the news about the joint ventures, I read it as OpenAI cannot afford the cost of selling to big companies on its own. Deploying engineers to customize models for clients is expensive, slow, and margin-destroying. The joint venture shifts that cost onto PE firms while they think they’re buying access. They’re not. They’re picking up the actual cost of the work, dressed up as a partnership. It is a smart move, especially when you are preparing for a public offering.
Here is the line buried in the Reuters report that you should read again and again. The joint venture structure would provide “clearer segment reporting that can support the IPO narrative.”
Loosely translated (and financial analysts would be better to break this down), the JV structure allows OpenAI to create a line item that makes it look like it has recurring enterprise revenue, which is exactly what IPO bankers need to justify a valuation of a trillion dollars. The real product here is not AI. It is an IPO prospectus.
Maybe I am completely off base. There is almost certainly something we don’t know. There might be a product breakthrough that changes everything. OpenAI has surprised before.
However, it is hard to ignore that both Jensen and Bravo raised issues around OpenAI as a business. After all, no healthy business needs to offer terms that OpenAI is offering. You know why this is happening. It is because the need for cash is real. And the need to go public and get that cash is even more real. That 17.5 percent guarantee is just a magic number in magic math.
Previously on this topic: