OpenAI’s dominance is unlike anything Silicon Valley has ever seen

Virtually every successful tech startup throughout history has faced the reality that they could be swallowed up or crushed by a large incumbent at any time. This is part of the daily life of an entrepreneur.

But the company at the center of the current boom is a different kind of beast.

Unlike industry giants of past eras, OpenAI is a private company. His finances are mostly secret and his ability and willingness to spend other people’s money is second to none.

And as OpenAI has proven recently, through a dizzying array of mammoth deals and product rollouts, the AI ​​lab is investing from the top to the bottom of the stack – from the picks and shovels of data center development to consumer applications, coding tools and even devices. Its flagship chatbot ChatGPT has reached 800 million weekly users.

“If you’re an entrepreneur, you need to ask yourself, ‘Where is the white space?’ “, said Nina Achadjian, a partner at Index Ventures who focuses on AI.

Not that Achadjian remains out of the market.

In a transaction announced Wednesday, Achadjian and Index led a $25 million investment in Quilter, which uses AI to develop software for printed circuit boards (PCBs). The company was founded in 2019 by former SpaceX engineer Sergiy Nesterenko.

Achadjian described Quilter as “pretty niche” and “not built on a template.” She said OpenAI was unlikely to be competitive in a space where companies like Cadence design And Synopsis have long developed technology for chip design, adding that a PCB is found in every consumer device, light bulb, car tire, and virtually every electronic device.

Still, “there’s no predictability,” she said. Compared to past cycles, “it’s more opaque and difficult to predict which direction these guys are going to go.”

In less than three years, OpenAI has gone from an AI startup run by the man who ran Y Combinator to a $500 billion goliath running a White House-approved data center construction plan and partnering with the world’s most valuable company, Nvidia.

The last few months have gotten even crazier.

CEO Sam Altman is everywhere, closing massive infrastructure-related deals with Nvidia, Broadcom Oracle And AMD. Last week his company rolled out its Sora AI video app, which reached 1 million downloads in less than five days, and this week he participated in OpenAI’s DevDay in San Francisco, attended by about 1,500 developers.

At DevDay, Altman announced the general availability of Codex, OpenAI’s software engineering agent, and said that Sora 2 is now in the application programming interface (API) and can be tested by coders. He also took the stage with iPhone designer Jony Ive, who joined OpenAI in May as part of a $6.4 billion talent acquisition, with a mission to build AI hardware.

Ive remained vague about what exactly he was building, and he told Altman on stage that he hoped to develop tools that would “make us happy and fulfilled and more peaceful and less anxious and less disconnected.”

OpenAI has clearly positioned itself as the defining company of the generative AI era. It follows other consumer internet brands that have defined their category over the past few decades, namely Amazon in e-commerce and cloud infrastructure, Google in web search and digital ads, Facebook in social media and Apple in mobile applications.

During these market booms, successful startups were born, and many more failed for a variety of reasons, including the inability to find a path large enough to build a sustainable business or obtain direct distribution.

Mobile app developers have been forced to reach users through busy app stores owned by Apple and Google. Facebook and Google have become the go-to ways to find customers on the Internet, and Amazon Web Services has become the go-to platform for startups to launch their businesses as a more efficient alternative to purchasing their own servers.

In each case, the big platform companies released tools and features that competed directly with their customers, sometimes eliminating them.

Ethan Kurzweil, managing partner at venture capital firm Chemistry, said the biggest difference today is speed.

AI startups are forming and quickly propelling to historic valuations, and OpenAI is scaling even faster, launching services that compete with AI coding tools, agent kits, and other applications running in ChatGPT.

“This is the fastest period of startup creation and disruption in my 17 years of investing,” said Kurzweil, who spent the first 16 of those years at Bessemer Venture Partners before moving into chemicals in 2024.

Kurzweil said OpenAI does a lot of things that are “theoretically scary to a lot of people,” but that there is a “gold rush mentality that a lot of companies will succeed in.”

The prevailing view is that AI startups should target industries that are heavily regulated or have other dynamics that make them less likely to choose general-purpose AI services.

In healthcare, Heidi Health and DUOS announced big deals this week, while EvenUp and Spellbook raised significant capital to take on lawyers.

“There are many areas, like finance and healthcare, where buyers want someone who speaks their language,” Kurzweil said.

In late September, Chemistry hosted an event featuring OpenAI COO Brad Lightcap. Kurzweil said one of the main topics of conversation among attendees was that there were no “technical divides.”

This is evident at the fundamental model level, where OpenAI competes against Anthropic, Google, Meta and others.

Rather, the advantage companies have is momentum, which is part of the reason OpenAI has recently struck high-profile deals worth hundreds of billions of dollars with major tech players, while simultaneously offering its rapidly expanding user base more applications and features.

In doing so, OpenAI burns through massive amounts of money without having to worry about Wall Street’s reaction.

“There is no math, because none of the companies are public,” Achadjian said, referring primarily to OpenAI and Anthropic, which last month said they had raised $13 billion at a valuation of $183 billion. “This further promotes the exuberance of capital raising, capital spending and vertical integration.”

Representatives for OpenAI and Anthropic did not respond to requests for comment.

In the first half of the year, growth-stage venture capital investments reached $83.9 billion, driven by AI deals of more than five billion dollars, according to the second quarter report from the National Venture Capital Association and Pitchbook.

On an annualized basis, this would far surpass the 2021 peak, when $96.1 billion was deployed at the growth stage.

“AI continues to dominate the upper end of the transaction spectrum,” the report states.

Exa Labs, which describes its product as “research designed for AI,” raised an $85 million Series B round in September from investors including Nvidia, at a valuation of $700 million. Founded in 2021, Exa introduced its first search engine in November 2022, two weeks before the release of ChatGPT.

“It would be really surprising to see a company that doesn’t compete with OpenAI,” Jeff Wang, co-founder of Exa, said in an interview this week. “We’re in the same boat as everyone else.”

But Wang said OpenAI is an asset to his startup and the broader ecosystem as it creates tools that improve other companies’ products.

Wang said that while OpenAI may be in the search market — many people now use ChatGPT instead of Google — the new world we’re entering won’t be dominated by a single search engine.

Wang said that hobbyists and people who build AI products pay for Exa’s service and that it is used within companies that have “specific and gigantic needs.”

“The pie is really big and OpenAI is just one company,” Wang said.

— CNBC’s MacKenzie Sigalos and Ashley Capoot contributed to this report.

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