OpenAI’s advantage is unlike anything Silicon Valley has seen before

Virtually every successful technology startup in history has faced the reality that at any time they could be swallowed up or overrun by a large, established company. For entrepreneurs, it’s part of everyday life.

But the companies at the center of the current boom are a different kind of beast.

Unlike industry giants of the past, OpenAI is privately held. Its finances are largely secret, and its ability and willingness to spend other people’s money is unparalleled.

And, as OpenAI recently demonstrated, through a dizzying array of deals and product rollouts, artificial intelligence labs are investing across the stack, from hand-picked data center development to consumer applications, coding tools, and even devices. Its flagship chatbot, ChatGPT, reaches 800 million users weekly.

“If you’re an entrepreneur, you have to ask yourself, ‘Where’s the white space?'” said Nina Achadjian, a partner at Index Ventures who focuses on AI.

It’s not that Achajan is staying away from the market.

The deal announced Wednesday was led by Achadjian and Index to invest $25 million in Quilter, a company that uses AI to develop printed circuit board (PCB) software. The company was founded in 2019 by former SpaceX engineer Sergiy Nesterenko.

Achadjian described Quilter as “pretty niche” and “not built on any model.” She said OpenAI is unlikely to compete in a space populated by companies such as: cadence design and synopsis He has been developing chip design techniques for many years, adding that PCBs are used in every consumer device, light bulbs, car tires and virtually all electronic equipment.

Still, she says, “it’s impossible to predict.” Compared to past cycles, “it’s more uncertain and difficult to predict which direction they will go.”

In less than three years, OpenAI has grown from an AI startup led by someone who once ran Y Combinator to a $500 billion behemoth with a White House endorsement and a partnership with the world’s most valuable companies to lead data center construction projects. Nvidia.

The last few months have been even crazier.

CEO Sam Altman is everywhere, signing big infrastructure deals with NVIDIA. broadcom oracle and AMD. Last week, his company launched its Sora AI video app, which reached 1 million downloads in less than five days. This week, he gave a keynote speech at OpenAI’s DevDay in San Francisco, which was attended by about 1,500 developers.

At DevDay, Altman announced the general availability of Codex, OpenAI’s software engineering agent, and said Sora 2 is built into an application programming interface (API) that programmers can test. He also took to the stage with iPhone designer Jony Ive, who joined OpenAI in May as part of a $6.4 billion talent hire and was tasked with building AI hardware.

Although Ive remains vague about exactly what he is building, he told Altman on stage that he wants to develop tools that “make us happier, more fulfilled, more peaceful, less anxious, less connected.”

OpenAI is clearly positioning itself as the company defining the generative AI era. This follows consumer internet brands that have defined other categories over the past few decades. Amazon In e-commerce and cloud infrastructure, google web search and digital advertising; facebook social media and apple With mobile app.

While successful startups were born during this market boom, many more failed for various reasons, including an inability to build a sustainable business or find a lane large enough to gain direct distribution.

Mobile app developers are forced to reach users through extremely crowded app stores owned by Apple and Google. Facebook and Google have become essential ways to find customers on the Internet, and Amazon Web Services has emerged as the go-to platform for startups to launch their companies as a more efficient alternative to buying their own servers.

In both cases, large platform companies released tools and features that directly competed with their customers, sometimes wiping them out.

Ethan Kurzweil, managing partner at Chemistry Ventures, said the biggest difference today is speed.

AI startups are founded and quickly reach historic valuations. OpenAI is moving even faster, launching AI coding tools, agent kits, and services that compete with other apps that run within ChatGPT.

“This is the fastest time in my 17-year investing career when startups are being created and destroyed,” Kurzweil said. Kurzweil will spend the first 16 years of his career at Bessemer Venture Partners before starting chemistry in 2024.

Kurzweil said OpenAI does a lot of things that are “in theory scary to a lot of people,” but there’s a “gold rush mentality that a lot of companies are going to get away with.”

One common view is that AI startups should target industries that are highly regulated or less likely to choose general purpose AI services.

In the healthcare space, Heidi Health and DUOS announced major funding this week, and EvenUp and Spellbook raised significant capital to pursue lawyers.

“There are a lot of fields, like finance and health care, where buyers want people who can speak their language,” Kurzweil said.

In late September, Chemistry hosted an event featuring Brad Lightcap, Head of Operations at OpenAI. Kurzweil said a big talking point among attendees was the lack of a “technical moat.”

That’s evident at the fundamental model level, where OpenAI is up against the likes of Anthropic, Google, and Meta.

Rather, the company’s advantage lies in its momentum, which helps explain why OpenAI has recently clinched high-profile deals worth hundreds of billions of dollars with major technology companies, while simultaneously offering more apps and features to its rapidly expanding user base.

In the process, OpenAI is burning a lot of cash without worrying about Wall Street’s reaction.

“You can’t do the math because none of the companies are public,” Achajan said, referring primarily to OpenAI and Anthropic, which last month announced they had raised $13 billion at a valuation of $183 billion. “This will further fuel the boom in capital raising, capital investment and vertical integration.”

Representatives for OpenAI and Anthropic did not respond to requests for comment.

Venture growth-stage investments reached $83.9 billion in the first half of this year, driven by more than $5 billion in AI deals, according to the National Venture Capital Association and Pitchbook’s second quarter report.

Annualized, this would far exceed the peak in 2021, when $96.1 billion was pumped into the growth phase.

“AI will continue to dominate the top of the trading spectrum,” the report said.

Exa Labs, which describes its product as “search built for AI,” raised an $85 million Series B round in September from investors including Nvidia at a valuation of $700 million. Founded in 2021, Exa introduced its first search engine in November 2022, two weeks before the release of ChatGPT.

“I would be really surprised if a company didn’t compete with OpenAI,” Exa co-founder Jeff Wang said in an interview this week. “We’re in the same boat as everyone else.”

But Wang said OpenAI is an asset to his startup and the broader ecosystem in that it is building tools that make other companies’ products better.

Wang said that while OpenAI may enter the search market, with many now using ChatGPT instead of Google, the new world we are entering will not be dominated by a single search engine.

Wang said hobbyists and people developing AI products are paying for Exa’s services, and Exa is being used within companies with specific “huge needs.”

“The pie is very big, but OpenAI is just one company,” Wang said.

—CNBC’s MacKenzie Sigalos and Ashley Capoot contributed to this report.

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