The AGI-Sized Hole in the Microsoft-OpenAI Partnership

Today on the AI Daily Brief, trouble brewing between Microsoft and OpenAI 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 valuation. According to reporting from the Wall Street Journal, Perplexity 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 SoftBank over the summer. If they can get it closed by December, this would be Perplexity's fourth fundraise of the year. Back in January, when they closed their Series B, they were valued at just half 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 valuation will be a test of how eager investors are to own a piece of buzzy AI startup showing signs of market traction. Now, there are a couple different takes on this. First of all, by way of understanding actually what's going on from a metrics perspective, WSJ reports that Perplexity is currently disclosing 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 get that $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. In other words, it matters a lot more that they went from 10 to 50 million over the course of 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. Prakar on 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 to already show for, expect the next set of money to be spent solely on distribution. CEO Arvind Srinivas has also been aggressive on Twitter, clearly putting Google in the company's sites and then over the weekend. Also asking what do you currently use Siri for on a daily basis? One of the things that I'm increasingly convinced of is that one of the great battles over the next year or so is going to be NotebookLM versus perplexity. Both of these are effectively spaces to organize and share a bunch of information. NotebookLM has created a ton of buzz with its audio overview feature, which last week got an upgrade which is now more steerable. But Perplexity Spaces is no slouch either, and I would be shocked if it takes more than a month from where we are right now to get some version of audio overviews on Perplexity. Less likely in partnership with a company like eleven 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. It 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's main 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't currently available. In his latest column for Bloomberg, Apple Whisperer, Mark Gurman wrote about Apple and AI, saying that their new iPad mini quote highlights the company's secret advantage in AI. And basically what Gurman says is that quote, apple has a cherished brand, nearly limitless resources, and a history of coming from behind and being successful. At some point, Apple will either develop, 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 roll out 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 M4Mac rollout, which will further speed up AI tasks. Still, even Gurman notes, compared with the latest fare from Google, OpenAI and Meta, Apple's AI is still far behind. Even some internal studies at Apple reflect this. I'm told the research found that OpenAI's ChatGPT was 25% more accurate than Apple's Siri and 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 Midjourney is expanding its plans for world domination by announcing a new tool to allow users to edit any uploaded images from the web using Midjourney's AI. Basically, this will allow people to take existing images and, rather than generating them from scratch, make specific changes and customizations. All of this, I think, amounts to just yet another way in which AI will infiltrate absolutely everything you see. User beware. 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Welcome back to the AI Daily Brief. There has been for some time a growing question around the relationship between Microsoft and OpenAI. A relationship that Sam Altman had once called the best bromance in tech has increasing signs of trouble. At the end of last week, the New York Times went out of its way to get more details around this and interviewed 19 people familiar with the relationship between the companies. They write financial pressure on OpenAI, concerns about its stability, and disagreements between employees of the two companies have strained their five year partnership. Now, of course, one of the places that these questions started to come up was around the firing and then rehiring of Sam Altman last year. My feeling has been, even 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, Satya Nadella and Microsoft were going to have to start to carve out more space. They had seen how fickle the OpenAI 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. They 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 smaller part of the reported 6.7 billion in funding. What's more, OpenAI have also moved away from using Microsoft as their sole provider of computer with reports that Microsoft couldn't keep up with the training needs of their next frontier model. OpenAI has now contracted with Oracle to build their next training supercluster. Although the deal is technically structured through Microsoft to avoid breaking their exclusivity, sources also made clear that the whole firing and rehiring of Altman last year did make Microsoft less interested in keeping the money spigot running. And then, of course, there's the question of this switch from a nonprofit to a for profit. Microsoft has a massive ownership stake in a company that is about to go through one of the most controversial corporate restructurings in history. It is at this stage unclear exactly how OpenAI plans to morph into a for profit, but most believe that it will involve a large payment to the not for profit. The Wall Street Journal reports that both companies have hired investment bankers 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. Now, Microsoft's deal terms were not straightforward. They involved a huge chunk of future profits and control over some of the IP and research. They're not technically shareholders, but own profit participation units. This means that during the restructuring, basically everything is open to negotiation, including the share that Microsoft will own and the nature of their governance rights. This all gets even more complicated when you consider 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 years or risk investors from the latest round asking for their money back now. One of the biggest signs that Microsoft had started to move away from OpenAI was when they announced that they had basically aqua hired staff from Inflection AI, including putting CEO Mustafa Suleyman in charge of a new AI division. According to the Times, this caused a major rift between the two companies. Some OpenAI executives and employees, including Mr. Altman, are angered that Mr. Suleyman is at Microsoft, according to five people familiar with the relationship. Mr. Sullivan's team is part 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 provided by OpenAI that are set up to maintain the startup security protocols. Some OpenAI staff recently complained that Mr. Silliman yelled at an OpenAI employee during a recent video call because he thought the startup was not delivering new technology to Microsoft as quickly as it should. Others took umbrage after Microsoft's engineers downloaded important OpenAI software without following the protocols the two companies had agreed on. Now it's very hard not to read that whole new division at Microsoft as 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 OpenAI is that their contract contains a clause that basically says that if OpenAI achieves artificial general intelligence, Microsoft loses access to OpenAI's technologies. As the Times puts it, the clause was meant to ensure that a company like Microsoft did not misuse the machine of the Future. But today OpenAI executives see it as a path to 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. That is potentially a very dangerous situation. Some people are unsympathetic. Buco Capital on X writes, Microsoft deserves to get rugged. If they signed a contract saying AGI means Microsoft loses access and OpenAI decides if AGI is achieved. Leon Palafox writes, I'm willing to bet this is the whole reason Sam has been saying they're about to get to AGI. Look, ultimately this tie up has been unique in precedent setting when it comes to Silicon Valley, it was a relationship that was neither an investment nor a clean acquisition. And so of course there was going to be some challenge figuring out how to make it all work. I think that one can believe that both of these parties still are operating in total good faith with regard to one another and still understand that it's going to be messy. Now, one other interesting detail before we get out of here the Information last week published a piece about Greg Brockman coming back to OpenAI and all the challenges that that might entail. But someone pointed out that in that article one interesting little nugget is that all of the leadership changes might have actively impacted this latest fundraise, the Information writes. Leadership changes may have already had an impact on OpenAI's fundraising efforts. Shortly after CTO Mira Murati announced she would be leaving the company, Apple pulled out a fundraising talks. In a meeting, CFO Sarah Fryer said Apple didn'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 Daily Brief. Until next time, Peace. Sam.