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The AGI-Sized Hole in the Microsoft-OpenAI Partnership

October 23, 20240 comments♥ 0
00:00Today on the AI Daily Brief, trouble brewing between Microsoft and Open AI,and Perplexity is back in talks to raise money at an $8 billion valuation.The AI Daily Brief is a daily podcast and video about the most important news and discussions in AI.To join the conversation, follow the Discord link in our show notes.Welcome back to the AI Daily Brief Headlines edition,all the daily AI news you need in around five minutes.We kick off today with another big fundraising story.Perplexity is reportedly seeking to raise new money at an $8 billion.
00:37valuation. According to reporting from the Wall Street Journal,Proplexity is seeking to raise around $500 million, and if the deal closes on these terms,that would more than double the firm's $3 billion valuation when it last raised from SoftBover the summer. If they can get it closed by December, this would be Perplexity's fourthfundraise of the year. Back in January, when they closed their Series B, they were valued at justhalf a billion dollars, meaning a potential 16x in a single year.Writes the journal, its efforts to raise more money so soon at a substantially increased valuationwill be a test of how eager investors are to own a piece of buzzy AI startup showing signs of market
01:10traction. Now, there are a couple different takes on this. First of all, by way of understandingactually what's going on from a metrics perspective, WSJ reports that perplexity is currentlydisclosing 50 million in annualized revenue to potential investors, which is up from 10 million in March.Their consumer offering is reportedly now serving 15 million queries per day. So if they did getthat $8 billion valuation, that would be a raise at 160 times revenue. That is certainly high,but it's not unheard of in Ventureland.And it's also clear that this isn't about a revenue multiple consideration.It's about trajectory and momentum.
01:42In other words, it matters a lot more that they went from 10 to 50 million over the courseof about six months.And it matters even more that perplexity just has the narrative perception of momentum,excitement, and product market fit.The company has been executing aggressively.Procaron X summed up the vibe saying,From the outside, perplexity looks like a once-in-a-generation company firing on all cylinders,design product engineering marketing, with product market fit and a massive total addressable market
02:07to already show for. Expect the next set of money to be spent solely on distribution.CEO Arvin Shrinivas has also been aggressive on Twitter, clearly putting Google in the company'ssites, and then over the weekend also asking, what do you currently use Siri for on a dailybasis? One of the things that I'm increasingly convinced of is that one of the great battles over thenext year or so is going to be Notebook L.M versus perplexity. Both of these are effectivelyspaces to organize and share a bunch of information.Notebook LM has created a ton of buzz with its audio overview feature,which last week got an upgrade, which is now more steerable,
02:39but perplexity spaces is no slouch either.And I would be shocked if it takes more than a month from where we are right nowto get some version of audio overviews on perplexity,likely in partnership with a company like 11 Labs.Going after the type of players perplexity is going after is not going to be easy.Google still has incredible distribution power,and dethroning them from search is basically where startups go to die.However, perplexity doesn't have a legacy business model that AI is disrupting.
03:08It gets the design for this new world completely from the bottoms up.Google as a public company where AI summaries have the potential to negatively impact Google'smain advertising market?Well, it gets a lot more complicated.It is certainly one of the most interesting companies to watch, and so watch it we shall.Now, speaking of big companies in AI, Apple has sort of nominally,finally gotten into the game, but of course, most of their Apple intelligence features still aren'tcurrently available. In his latest column for Bloomberg, Apple Whisperer Mark German wrote about Apple and
03:38AI, saying that their new iPad Mini, quote, highlights the company's secret advantage in AI.And basically what German says is that, quote, Apple has a cherished brand, nearly limitlessresources, and a history of coming from behind in being successful. At some point, Apple will eitherdevelop, hire, or acquire its way into the top tier of AI companies. He continues,Apple also has another advantage as it tries to catch up, the ability to rollout features to a massive base of devices.As showcased with the iPad Mini, Apple can quickly equip its current products with the technology needed to run new software.We'll see this again soon with the M4 Mac rollout, which will further speed up AI tasks.Still, even German notes, compared with the latest fare from Google, OpenAI, and meta, Apple's AI is still far behind.
04:19Even some internal studies at Apple reflect this, I'm told.The research found that OpenAI's chat GPT was 25% more accurate than Apple's Siri,able to answer 30% more questions. In fact, some at Apple believe that its generative AI technology,at least so far, is more than two years behind the industry leaders.Lastly, today, a fun little one. Mid Journey is expanding its plans for world domination byannouncing a new tool to allow users to edit any uploaded images from the web using MidJourney'sAI. Basically, this will allow people to take existing images, and rather than generating themfrom scratch, make specific changes in customizations. All of this, I think, amounts to just yet
04:55another way in which AI will infiltrate absolutely everything you see. User beware.For now, though, that is going to do it for today's AI Daily Brief Headlines edition.Next up, the main episode.Today's episode is brought to you by Venice. Venice is a private, uncensored, generative AI app.It accesses open source models to enable text, image, and code generation without the fear ofbeing spied on or having your data exploited. Discuss anything with Venice without concernabout it being monitored, sold, or given to advertisers and governments. Venice is differentbecause your conversations and creations are kept securely within the browser, never stored or accessible by Venice.
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08:29Welcome back to the AI Daily Brief. There has been for some time a growing question aroundthe relationship between Microsoft and OpenAI. A relationship that Sam Altman had once calledthe best bromance in tech has increasing signs of trouble. At the end of last week, the New YorkTimes went out of its way to get more details around this and interviewed 19 people familiar withthe relationship between the companies. They write financial pressure on OpenAI, concerns aboutits stability, and disagreements between employees of the two companies have strained theirfive-year partnership. Now, of course, one of the places that these questions started to come upwas around the firing and then rehiring of Sam Altman last year. My feeling has been,
09:11even though Microsoft went out of its way to say they supported whatever happened in that situation,and you'll remember, planned on taking Altman and most of the team from OpenAI into Microsoft,behind the scenes, you have to think that just from a sheer fiduciary responsibility standpoint,Satch and Adela and Microsoft were going to have to start to carve out more space.They had seen how fickle the Open AI board would be, and as we'll get into,OpenAI's board has a significant impact on how Microsoft's long-term relationship with OpenAI comes to an end.So let's get into some of the new details that came out, or at least got more clarity as part of this piece in the New York Times.Obviously during previous fundraising rounds, Microsoft has been OpenAI's biggest investor.
09:49They bought roughly 49% of the company or nonprofit after spending around $13 billion.The latest round, which closed this month, did include Microsoft again, but as a much smallerpart of the reported $6.7 billion in funding. What's more, OpenAI have also moved away fromusing Microsoft as their sole provider of compute, with reports that Microsoft couldn't keepup with the training needs of their next frontier model. OpenAI has now contracted withOracle to build their next training supercluster, although the deal is technically structuredthrough Microsoft to avoid breaking their exclusivity. Sources also made to clearclear that the whole firing and rehiring of Altman last year did make Microsoft less interested
10:24in keeping the money spigot running. And then, of course, there's the question of this switch from anonprofit to a for-profit. Microsoft has a massive ownership stake in a company that is about to gothrough one of the most controversial corporate restructurings in history. It is at this stage unclearexactly how Open AI plans to morph into a for-profit, but most believe that it will involve a largepayment to the not-for-profit. The Wall Street Journal reports that both companies have hired investmentbankers to help negotiate how much equity Microsoft is going to get when OpenAI actually becomes a for-profit.Microsoft has reportedly engaged Morgan Stanley while OpenAI is working with Goldman Sachs.It's also reported that Sam Altman has brought in Michael Klein, a former Citigroup banker who he has close ties with as an additional consultant.
11:04Now, Microsoft's deal terms were not straightforward. They involved a huge chunk of future profitsand control over some of the IP and research. They're not technically shareholders but ownprofit participation units. This means that during the restructural,structuring basically everything is open in negotiation, including the share that Microsoftwill own and the nature of their governance rights. This all gets even more complicated when youconsider the current aggressive antitrust climate at the FTC, which would need to approve the deal.And as if that isn't difficult enough, OpenAI must convert to a for-profit within two yearsor risk investors from the latest round asking for their money back. Now, one of the biggest signs
11:39that Microsoft had started to move away from Open AI was when they announced that they hadbasically Aqua hired staff from Inflection AI, including putting CEO Mustafa'sSilliman in charge of a new AI division. According to the times, this caused a major rift betweenthe two companies. Some OpenAI executives and employees, including Mr. Altman, are angered that Mr. Silliamenis at Microsoft, according to five people familiar with the relationship. Mr. Silliaman's team ispart of a group of Microsoft engineers who work directly with employees at OpenAI.Dozens of Microsoft engineers work on site at OpenAI's office in San Francisco and use laptops providedby OpenAI that are set up to maintain the startup security protocols. Some open AI staff recently complained
12:16that Mr. Silliman yelled at an OpenAI employee during a recent video call because he thought thestartup was not delivering new technology to Microsoft as quickly as it should. Others took umbrage afterMicrosoft's engineers downloaded important OpenAI software without following the protocolsthe two companies had agreed on. Now, it's very hard not to read that whole new division at Microsoftas a hedge against instability at OpenAI following the board controversy last November.Still, the biggest thing lurking, and I think again this goes back to that last fall controversy,is that one of the most unique terms in the deal between Microsoft and OpenAIis that their contract contains a clause that basically says that if OpenAI
12:51achieves artificial general intelligence, Microsoft loses access to OpenAI'stechnologies. As the Times puts it, the clause was meant to ensure that a company like Microsoftdid not misuse the machine of the future, but today OpenAI executives see it as a pathto a better contract. Under the terms, the OpenAI board could decide when AGI has arrived.And that, my friends, is why the board behaving so crazily last fall.had to have spooked Microsoft.If the board can just decide at any given time,oops, we've hit AGI, and that nullifies Microsoft's access,
13:21that is potentially a very dangerous situation.Some people are unsympathetic.Bucco Capital on X writes,Microsoft deserves to get rugged if they signed a contract saying AGI means Microsoftloses access, and OpenAI decides if AGI is achieved.Leon Pallifox writes,I'm willing to bet this is the whole reason Sam has been sayingthey're about to get to AGI.
13:39Look, ultimately, this tie-up has been uniqueprecedent setting when it comes to Silicon Valley. It was a relationship that was neither an investmentnor a clean acquisition, and so of course there was going to be some challenge figuring out how to make it allwork. I think that one can believe that both of these parties still are operating in total good faithwith regard to one another and still understand that it's going to be messy. Now one other interestingdetail before we get out of here, the information last week published a piece about Greg Brockmancoming back to OpenAI and all the challenges that that might entail. But someone pointed out that in thatarticle, one interesting little nugget is that all of the leadership changes might have actively
14:16impacted this latest fundraise. The information writes, leadership changes may have already had animpact on OpenAI's fundraising efforts. Shortly after her CTO, Mira Miri Maradi announced she would beleaving the company, Apple pulled out of fundraising talks. In a meeting, CFO Sarah Friar said Appledidn't give an explicit reason behind its decision, but she believed it was due to Murati's exit.Interesting times in the land of OpenAI. That, however, is going to do it for today's AI Dailybrief. Until next time, peace.Peace.