How to Invest in OpenAI Before It Goes Public
Initial public offerings (IPOs) can attract a lot of attention, which is especially true for companies that are already prominent. That’s exactly what happened to OpenAI, the maker of ChatGPT, with recent reports suggesting that the much-anticipated AI company’s IPO could come as soon as the end of this year.
For retail investors worried about being left behind, the good news is that you don’t need to be a tech titan or a billionaire with the inside track to invest in a company. If you have an investment in The Magnificent Seven – Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla – or other big tech companies that have inked deals with OpenAI, you already have a chance to get a busy startup in your portfolio.
Whether you own index funds inside your 401(k) or a brokerage account, the complex and symbiotic financial relationship OpenAI has with major chipmakers and hyperscalers means you too can benefit if — or, as many would argue, when — the AI juggernaut reaches its full revenue potential.
How have investors been exposed to OpenAI?
Investments made by Silicon Valley heavyweights in OpenAI often take the form of so-called round finance deals. Although not without risks, these deals have the potential to help investors grow and increase revenue for established technology companies.
The agreements between OpenAI and large technology firms such as Nvidia, Microsoft, Amazon and Meta Platform usually look like this: The funding company invests some money in the startup; in return, the startups promise to use that money to buy their goods or services.
OpenAI’s $10 billion investment from Microsoft in 2023, for example, has given it capital to turn around and buy cloud computing capacity in Microsoft’s Azure data centers.
“It’s money designed to go back to Microsoft, so… what they’re really getting is $10 billion of cloud,” said Michael Brenner, senior research analyst and asset allocation strategist at FBB Capital Partners.
OpenAI has similar agreements in place with Alphabet, Amazon, CoreWeave, Disney, Nvidia and Oracle, among other publicly traded companies. And while crowdfunding is not new, it has become a major driver of the AI industry’s growth for several reasons, says Jed Ellerbroek, portfolio manager at Argent Capital Management. “There are several layers to it,” he says.
For one thing, the amount of money startups like OpenAI are burning to stay competitive would be difficult if it weren’t possible to increase from other sources, especially with the speed they need to increase their computing power. Second, there is a particular appeal to large technology companies investing in companies that rely on their products to grow. These deals create demand and revenue for value companies and contribute to fast-growing, leading-edge startups. In return, those startups get the money they need to grow and develop their models.
This symbiotic relationship takes on another layer of importance when you think about how OpenAI’s ChatGPT and other large-scale languages are being used by big tech firms, Ellerbroek said. They “also provide distribution” by integrating themselves into the cloud-based technology tools that office workers use every day. This makes many people familiar with and use these models.
“The biggest example is Microsoft and OpenAI… Microsoft owns between 25% and 30% of OpenAI, so Microsoft shareholders benefit directly from OpenAI’s success,” he says. When companies license Microsoft’s office tools — programs like Word, Excel, Teams and Outlook — that include its OpenAI-powered Copilot tool, both companies benefit, Ellerbroek adds.
The OpenAI agreement made with Nvidia last fall – originally made as a $100 billion deal, as it has been reduced to $30 billion – is another good example: The chipmaker’s investment gives OpenAI the money it needs to buy Nvidia’s semiconductors – or to buy computing power from other technology companies that enable that work with Nvidia allowing it to increase Nvidia’s chips and provide revenue to Nvidia. now that allows it to reap the potential benefits of its equity stake later.
“They use hyperscalers for computing power, and hyperscalers represent about half of Nvidia’s revenue,” Brenner said.
How to get exposure if you are not invested
What all of this means in practice, Brenner said, is that mainstream investors’ exposure to OpenAI currently comes with the initial desire to start computing power, which has fueled huge demand for cloud capacity and processing hardware such as chips.
If you have money in mutual funds or exchange-traded funds (ETFs) invested in major technology stocks, you are already indirectly invested in OpenAI. Even broad index funds will give you exposure, given the market capitalization that grows larger as a percentage of weighted indexes like the S&P 500.
So while you can’t invest directly in the company right now, there are ways to benefit from its rapid growth, Brenner said. “If you’re interested in gaining exposure to OpenAI, the first step is to invest in the supply chain.”
And if you’re a more experienced, hands-on investor, there are ways to get even closer to the action, says Brian Mulberry, chief market strategist at Zacks Investment Management.
“There are a lot of ETFs out there, and you can diversify into different sectors to get the exposure you want,” he says. “Look at those who differentiate software versus hardware. Right now, I’m going to be a buyer of some of these hardware names,” he says.
“Obviously, we know Nvidia is the 100-pound gorilla in the room, [but] what we’re finding is that data centers are increasingly being designed and built using a combination of technologies,” Mulberry said, including products made by Nvidia’s less expensive competitors.
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