EA - How much do markets value Open AI? by Ben West

Link to original articleWelcome to The Nonlinear Library, where we use Text-to-Speech software to convert the best writing from the Rationalist and EA communities into audio. This is: How much do markets value Open AI?, published by Ben West on May 14, 2023 on The Effective Altruism Forum.Summary: A BOTEC indicates that Open AI might have been valued at 220-430x their annual recurring revenue, which is high but not unheard of. Various factors make this multiple hard to interpret, but it generally does not seem consistent with investors believing that Open AI will capture revenue consistent with creating transformative AI.OverviewEpistemic status: revenue multiples are intended as a rough estimate of how much investors believe a company is going to grow, and I would be surprised if my estimated revenue multiple was off by more than a factor of 5. But the "strategic considerations" portion of this is a bunch of wild guesses that I feel much less confident about.There has been some discussion about how much markets are expecting transformative AI, e.g. here. One obvious question is "why isn't Open AI valued at a kajillion dollars?"I estimate that Microsoft's investment implicitly valued OAI at 220-430x their annual recurring revenue. This is high - average multiples are around 7x, but some pharmaceutical companies have multiples > 1000x. This would seem to support the argument that investors think that OAI is exceptional (but not "equivalent to the Industrial Revolution" exceptional).However, Microsoft received a set of benefits from the deal which make the EV multiple overstated. Based on adjustments, I can see the actual implied multiple being anything from -2,200x to 3,200x.(Negative multiples imply that Microsoft got more value from access to OAI models than the amount they invested and are therefore willing to treat their investment as a liability rather than an asset.)One particularly confusing fact is that OAI's valuation appears to have gone from $14 billion in 2021 to $19 billion in 2023. Even ignoring anything about transformative AI, I would have expected that the success of ChatGPT etc. should have resulted in a more than a 35% increase.Qualitatively, my guess is that this was a nice but not exceptional deal for OAI, and I feel confused why they took it. One possible explanation is “the kind of people who can deploy $10B of capital are institutionally incapable of investing at > 200x revenue multiples”, which doesn’t seem crazy to me. Another explanation is that this is basically guaranteeing them a massive customer (Microsoft), and they are willing to give up some stock to get that customer.Squiggle model hereIt would be cool if someone did a similar write up about Anthropic, although publicly available information on them is slim. My guess is that they will have an even higher revenue multiple (maybe infinite? I'm not sure if they had revenue when they first raised).DetailsValuation: $19BA bunch of news sites (e.g. here) reported that Microsoft invested $10 billion to value OAI at $29 billion. I assume that this valuation is post money, meaning the pre-money valuation is 19 billion.Although this site says that they were valued at $14 billion in 2021, meaning that they only increased in value 35% the past two years. This seems weird, but I guess it is consistent with the view that markets aren’t valuing the possibility of TAI.Revenue: $54M/yearReuters claims they are projecting $200M revenue in 2023.FastCompany says they made $30 million in 2022.If the deal closed in early 2023, then presumably annual projections of their monthly revenue were higher than $30 million, though it's unclear how much.Let’s arbitrarily say MRR will increase 10x this year, implying a monthly growth rate of 10^(1/12) = 1.22Solving the geometric series of 200 = x (1-1.22^12) / (1 -1.22) we get that their first month revenue is $4.46M, a run rate of $53.52M/yearOther factors:The vast majority of the investment is going to be spent on Micros...