I’ve worked for enough startups that even if your company folds and goes bankrupt with no business plan the ip generally can easily cover the outstanding loans.
They have no moat. So, how do you get to $4B?
I think the models are wrong way too often for relatively simple queries, so unless they give a secret prompt like "be wrong a lot in the free version" to users, it's basically worthless.
This is a huge assumption.
I am not sure how differentiated OpenAI's IP is, so I don't have a strong opinion, but it seems to me that OpenAI is worth a lot more as a package than it would be as a collection of pieces.
Naa that takes too long to get any value from. If openAI goes pop, their IP isn't going to be worth much, because it'll die from competition, or the economy going to shit.
Anyway, J.P. Morgan's OpenAI loan isn't strange, it's calculated exposure to Microsoft.
The article linked[0] is from last year.
A recent article[1] from this year says "OpenAI looks to meet its full-year revenue target of $13 billion and a cash-burn target of $8.5 billion, the report added."
[0]https://www.reuters.com/technology/artificial-intelligence/o...
[1] https://www.reuters.com/technology/openais-first-half-revenu...
While, yes, it's overhyped and takes up too much of the spotlight, it isn't going anywhere and is going to continue to be a staple in our lives moving forward, and will continue to increase in impact as it improves.
Blockchain will always be blockchain, and it was absolutely a bubble. Will it improve? Sure. Will it ever be as impactful to the everyday individual as AI? Maybe, but most people will not know or care. It will mostly be a passive experience.
AI will/has fundamentally changed how we work in the matter of 3 years. So, financial system jumping on board this, is much safer than jumping onboard crypto hype trains.
(I'm not saying crypto is bad / is a bad investment, but lots of crypto and ai startups are both trash, well, most startups are trash, I say that as a founder who has had many trash ideas)
The past 3 years or the next 3 years or 1.5 years both ways?
It hasn't really done that yet. The work from home zoom meetings has made a bigger impact. Maybe in a few years? Its on par with the metaverse at this point.
You do remember that by the time the blockchain bubble burst, literally everyone and their mother were "interacting" with it?
> AI will/has fundamentally changed how we work in the matter of 3 years
For people in bullshit jobs creating workslops, yes its probably an absolute blessing. Enjoy it while it lasts.
The bank's risk seems quite a bit lower than the VC's risk.
Plus the post seems to only include 1 year of interest.
Unless we know the terms, I don't think we can necessarily calculate EV from JP Morgan's perspective. I would say that they aren't usually carelessly giving away money though... They probably have terms where they can get out early if OpenAI's position weakens etc.
I agree but had different questions. TFA mentions the consideration of whether failure cases are correlated, but of course if OpenAI wins big, there's a good chance this directly or indirectly creates much instability and uncertainty in many other loans/partners. What's the EV on whether that is net-positive considering this is a loan at 5% and not an investment?
On the other side, if OpenAI crashes hard, is it really such a sure thing that Microsoft will be the on the hook to pay off their debts? Setting aside whatever the lawyers could argue about in a post-mortem, are they even obligated to keep their current stake / can they not just divest / sell / otherwise cut their losses if the writing is on the wall?
(Also, a revolving credit facility is not a loan, which this discussion misses)
A company that has revenues and is extremely well-capitalized gets debt finance. That is not news. That is totally commonplace. "Shouldn't all their capital come from investors?" No. Companies at all stages typically use a mixture of debt and equity finance.
His EV calculation is completely flawed also. Debt finance is typically senior to equity in recovery at bankruptcy, so when JPMC do this analysis (and believe me they did this analysis) they are not assuming 0% recovery. They are thinking it is most likely in a bankruptcy that they get some x>0% recovery.
Finally, banks don't think about their relationship with a multi-billion-dollar company in terms of the ROI on a single revolving credit. (even though this will in all likelihood be very profitable for JPMC). They think about how giving this revolving credit makes it more likely they get advisory on any future bond issuance and I-banking work when OpenAI want to do takeovers, and a foot in the door at IPO time etc.
I think we're well beyond the point where OpenAI can be called a "startup."
Different dictionaries provide different definitions.
A common one is that it's small and recently started business, but it's a very vague boundary.
The $4B revolver will likely sit undrawn. When it gets drawn, there usually a specific plan to reduce it back to zero. It's not for building data centres, a revolver typically used just for timing differences like a credit card is used (and the lenders will be paying attention). Also, when things get bad, there are covenant triggers which would allow lenders to renegotiate.
> Cost: $1,000 Case 1 (90%): OpenAI goes bankrupt. Return: $0 Case 2 (9%): OpenAI becomes a big successful company and goes 10x. Return: $1,000 + 5% interest = $1,050 Case 3 (1%): OpenAI becomes the big new thing and goes 100x. Return: $1,000 + 5% interest = $1,050
The actual math is that if OpenAI succeeds, then there's a nod and a wink that JPM will land the lead role in the IPO or any mergers/acquisitions, which translates into huge fees.
This isn't a financial transaction. This is a "relationship" transaction.
This is the easiest money and best relationship JPM could imagine
Wow, that's slightly more than Yahoo has. Well, had.
In the 1% scenario, JPM could be looking at tens of billions on the upside, if this loan secures them the lead.
The loan value in case OpenAI goes bankrupt depends on the details of the deal.
> 0 of 0 matches
Some analysis.
Do we know they're selling their services below cost? I'm pretty confident they're making money on inference and burning through large piles of cash on capex and research.
People have to stop saying this with NO evidence to back it up. And by evidence I do not mean random investors opinions, anonymous "insider" infomation, etc. Give numbers. Saying the same thing 1000x doesn't make it true.
Show me how a company setting never before seen piles of money on fire is profitable. Until someone can i'll happily keep claiming they're unprofitable.
Obviously we cannot assume every business is profitable unless proven unprofitable. That's why reporting and audits exist.
Note that they totally could be! I'm not asserting one or the other. But unprofitable is the default, absent evidence.
Indeed, the other poster seems right: "The burden of evidence is on the side of the person making the claim" is simplistic and reductionist. "The burden of proof lies on the more unbelievable side" is more appropriate.
Taking an example: If I said the earth was not flat, and someone else told me to prove it, that proof would be unnecessary, because the earth being flat is more unbelievable than the alternative.
Oh, so you are just trolling. Got it.
>A recent article[1] from this year says "OpenAI looks to meet its full-year revenue target of $13 billion and a cash-burn target of $8.5 billion, the report added."
[1] https://www.reuters.com/technology/openais-first-half-revenu...
If it turns out that OpenAI becomes wildly profitable, they’ll just shift to some other argument about the environment or the specialness of human thought or whatever.
I would not be happy with this trade if I had any $JPM.
2) It's a revolver, it's not all being used
3) If things go great and OpenAI ends up buying smaller guys or getting bought out (probably MSFT?) then JPMC will be right in there with those young bankers who don't sleep. They will pull in many many millions in fees with very little expense.
4) If things don't go great, OpenAI will be looking for more financing. Guess who will help them?
5) It's really only in case there's an Enron things are terrible for JPMC. Like if it turns out the whole thing was a bunch of guys in India answering every ChatGPT query, something like that. If there's actually an AI business, and despite JPMC's history of due diligence misses (Javice case) that's probably the case, then there's deals to be done.
Who? I can only think of the Saudis/UAE and SoftBank.
If OpenAI folds, there are two basic scenarios:
- one: the LLM crash has come, and OpenAI barely has any material assets. Microsoft isn't putting more money into it, and they won't take it over -- people with seven figure salaries will be looking for six-figure jobs.
- two: somehow, only OpenAI crashes, and the rest of the LLM boom continues. This likely involves OpenAI being extraordinarily outcompeted, so it's a long slow decline as contracts run out and are not renewed. 40% is probably high, but if JPM can retract the revolving debt before it all goes out the door, not ridiculously high.
Duh. Basically the author wrote a word salad to say the bank calculated the probability of them losing money would be lower than what the author pulled out of their ass at the beginning of the article, refuting their own hypothetical point.
- existing models are profitable if cutoff future training and focused on inference
- debt is senior to equity
- if my life depended on one company not going bankrupt over the next decade I’d pick OAI over Citibank
- banks use revolving credit as a break even or loss leader for higher fee business
- high fixed cost businesses use debt and equity to scale
- lead investors would very rarely pay down the debt of an investment, that’s not the backstop
- unlikely for revolving credit, but a convertible structure could mitigate any perceived asymmetric downside
Taken from the About page:
Who are you? Hi, I'm the author. I've been dabbling in investing since 2015 and I decided to get more serious about it in 2023.
Is this financial advice? No. In fact, everything you read here is be half-baked by design. If it were fully-baked, then I wouldn't have felt the need to write about it in order to distill my thoughts.
You can basically throw the entire analysis out on a single point:
>Case 1 (90%): OpenAI goes bankrupt. Return: $0
It won't be $0. Creditors have liquidation priority and banks make very sure they're confident in the quality of the collateral before handing out billion dollar facilities.
themafia•2h ago
Exactly. If they completely fail and threaten to take the economy with them then they can just say "Luckily for us, taxpayers exist!"
flanked-evergl•2h ago
themafia•2h ago
drivebyhooting•1h ago
thevillagechief•1h ago
stackskipton•1h ago
adventured•1h ago
See: gold at $400 vs gold at $4,000. Aka the destruction of the USD.
JamesBarney•1h ago
Gold wasn't at $400 per oz before the financial crisis, and the spike in gold prices was fairly recent.
Basically the financial crisis response didn't cause inflation, the covid response did.
javaunsafe2019•2h ago
themafia•1h ago