Two-Minute Tech

To VC or not VC: with AI, that is the question

Today’s AI revolution is unlike previous disruption cycles in two key ways: AI startups need massive amounts of resources to build their technology, but venture capital (VC) firms are being stingy with funding.

  • Compared with technology giants, AI startups face significant operational challenges due to limited resources and restricted access to capital.
  • Microsoft played a crucial role in resolving the internal battle at OpenAI, leveraging its ownership stake and infrastructure support.
  • Public equity markets offer opportunities to capitalise on the growth potential of AI-related applications.

In the year since its launch, OpenAI’s ChatGPT has captured the attention of the investor community and the general public. People everywhere have been able to “kick the tyres” and see for themselves how artificial intelligence (AI) will start revolutionising industries, solving complex problems and enhancing human productivity. This is a vision that we have long held as long-time investors in technology and AI. 

In this environment, many of our clients have asked us whether it makes sense to invest in AI via public equities, or whether is there greater opportunity in the venture capital arena. This line of thinking is understandable, considering the many innovation cycles throughout history when nimble upstarts completely disrupted larger incumbents. We don’t have to look back far in time to find examples: social media disrupted traditional media, e-commerce disrupted brick-and-mortar retail, streaming video disrupted “linear” television, ridesharing disrupted taxis – the list goes on and on. 


However, we believe this innovation cycle may be different, because AI startups today are operating at a big disadvantage compared with their mega-cap counterparts: 

  1. Technology giants have much easier access to essential resources, including the infrastructure needed for massive computing power, a large enterprise sales force and immense repositories of data. Startups simply can’t compete unless they have access to enormous levels of capital – which feeds into the next point. 
  2. In today’s tight monetary environment, many startups can’t easily access the capital they require to push their innovative ideas forward. This has created a need for AI startups to partner with big technology “incumbents” – which creates opportunities in publicly traded companies.

Case in point: Consider the drama that recently played out at the San Francisco-based OpenAI. Back in November, the company’s then-current board of directors fired the company’s CEO, Sam Altman, before an internal revolt resulted in Altman’s reinstatement – and the ouster of most board members. 

Microsoft played an influential behind-the-scenes role in resolving this battle for control. The enterprise software giant had considerable leverage, with a 49% ownership stake in the for-profit arm of OpenAI1. OpenAI is also heavily reliant on Microsoft for compute infrastructure, monetisation opportunities and capital. With Microsoft in a prime position to put significant pressure on the OpenAI board, the saga was ultimately resolved in Microsoft’s favour. Altman was reinstated and Microsoft was rewarded with a seat on the revamped board. 

Clearly, the symbiotic relationship between Microsoft and OpenAI yielded a better outcome than if the two companies operated alone. Today, OpenAI has more stability than it did before the saga – thanks to Microsoft. And Microsoft has many new commercialisation opportunities – thanks to OpenAI’s innovations. In fact, a recent study by our in-house Grassroots Research team indicates that 67% of knowledge workers have a high level of interest in Microsoft’s AI-powered Copilot chatbot, and 69% believe they will need Copilot over time. Moreover, software engineering users who employ Copilot reported a 30-50% improvement in productivity almost immediately following implementation2.  
We have seen other technology companies form notable partnerships as well. Amazon, a worldwide active technology firm, is a major investor in Anthropic, which is a competitor to OpenAI. Amazon Web Services (AWS) is also the primary cloud provider for Anthropic, which will make its foundational models available to developers on AWS. Oracle, a US-based and globally operating computer technology company, invested in another AI startup, Cohere, which is delivering generative AI services built on the Oracle Cloud Infrastructure. 

It is becoming increasingly clear how forward-thinking mega-cap companies have positioned themselves to capture the growing pool of earnings that will arise from AI-related applications. This means public equity markets can be a great way to pursue the kind of value creation that generative AI offers. Exciting growth opportunities are indeed hidden in plain sight. Who Owns OpenAI? As of November 28, 2023
 2 Grassroots Research®, August 2023.


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