News & Analysis

It's the hottest deal in tech right now. Microsoft's reported plan to invest $10 billion for a 49% stake in OpenAI, the creator of viral ChatGPT, has catapulted generative AI to the forefront.

The segment is having a moment: Stable Diffusion-created portraits have clogged social media feeds, flashy startups like Runway have raised eye-watering sums, and VCs like Sequoia have touted generative AI's "potential to generate trillions of dollars of economic value."

But with Microsoft's planned investment into OpenAI, generative AI has hit an unprecedented milestone.  

The deal would have no equal in both size and valuation, reportedly around $30 billion including the investment.

Indeed, when looking at deals that took place in the last five years within the AI core subsegment—the deployment of machine learning and AI in the production pipelines of companies—the closest equivalent is Databricks' $1.6 billion funding round led by Counterpoint Global at a $38 billion valuation in 2021, according to PitchBook data. Databricks, with backers like Tiger Global and Andreessen Horowitz, offers a panoply of services to enterprise clients including machine learning for data processing.

To put that into perspective: Microsoft's OpenAI investment would be a sole endeavor more than five times greater than the Databricks round.

Up to this point, generative AI startups have gotten plenty of buzz, but nowhere near the same level of investment. Runway, a generative art and visual editing startup, closed a $50 million round in December. Synthesia, another startup using AI to create videos, raised $48.9 million roughly one year ago.

Within the larger universe of AI and machine learning startups, Microsoft's investment would put OpenAI toe-to-toe with the giants of self-driving cars and machine learning-powered social media apps.

Waymo, the self-driving car startup backed by the likes of Alphabet and Silver Lake, and ByteDance, the Chinese social media giant that owns TikTok, each raised $3 billion from several investors a few years ago. Microsoft's OpenAI deal would top them all.

The deal could make OpenAI about as valuable as Waymo, which was reportedly worth more than $30 billion in 2020.

Why is Microsoft paying up for OpenAI?

PitchBook analyst Brendan Burke suggested that by acquiring a stake in OpenAI, the software giant is hoping to land a foundational tool for building new products. Having generative AI integrated within software development tools is a key focus for Microsoft, Burke said. Led by CEO Sam Altman, OpenAI's ChatGPT service has been adept at creating code, and it could also easily be integrated into a code creation tool for Microsoft.

While there are other more obvious areas for integration, especially with the Bing search engine and Microsoft Office, less attention has been paid to generative AI's potential in gaming, an area that Microsoft has aggressively targeted. OpenAI's tools could be used for content and asset creation for Xbox Game Studios. Generative AI has also been discussed as a tool for Roblox, a competitor of Microsoft-owned Minecraft, so it isn't hard to see its potential for integration within other Microsoft properties.
 

Related read: Q3 2022 Artificial Intelligence & Machine Learning Report