Why OpenAI burns through billions

• That's a key difference between OpenAI and its chief rival Google — which makes tens of billions in profit each year, and sits on a cash hoard of around $100 billion.

Driving the news: The OpenAI round, announced Wednesday, was led by Joshua Kushner's Thrive Capital, joined by Microsoft, Nvidia, SoftBank, Khosla Ventures, Altimeter Capital, Fidelity, Tiger Global and MGX. Apple, which reportedly had been in talks to invest, didn't participate.

• OpenAI's deal tops the $6 billion raised earlier this year by Elon Musk's xAI.

The intrigue: OpenAI's latest cash haul comes just a little less than two years after Microsoft announced it was investing $10 billion in OpenAI over several years.

• A New York Times analysis of the company's finances concludes that CEO Sam Altman is likely to need to hit the road to raise more money "over the next year."

Follow the money: OpenAI needs successive mountains of dollars for three chief purposes.

1. Training big new generative AI models requires massive volumes of "compute" power from high-end chips (mostly Nvidia's) that run up gigantic energy bills. It also takes tons of data, at least some of which the company has to pay for.
2. Once the model is trained, operating an AI service like ChatGPT that's in heavy use by throngs of users also runs up high bills for computing power, data-center use and energy.
3. Since the AI boom hit, demand for skilled researchers and engineers has skyrocketed, turning "keeping the talent happy" into a third cost center for OpenAI and its rivals. The company has added 1,000 employees over the past year, more than doubling in size.

By the numbers: OpenAI expects to bring in $3.7 billion this year, and predicts that number will rise to $11.6 billion next year, per The Times.

• But the company is on track to lose $5 billion this year, The Times says, citing an analysis by a financial professional who reviewed OpenAI documents.
• OpenAI's training costs could run as high as $3 billion this year, and it's spending nearly $4 billion to keep ChatGPT running, per The Information.
• Most of that money is going back to Microsoft, which hosts OpenAI's infrastructure.

OpenAI has seen huge growth in usage of ChatGPT since the company in April started giving access to users who haven't set up an account.

• June saw 350 million monthly users on the service, up from 100 million in March, according to The Times.
• These free users represent astonishing growth for the company, but also add to costs.

Between the lines: Software businesses have always benefited from economies of scale — once you build the product, adding incremental customers brings in revenue without piling up new costs.

• But for OpenAI, new customers are adding to the red ink.
• If the company wants to change that, the most likely move would be to start featuring ads in ChatGPT.
• OpenAI faces a host of other risks, including competition for both talent and users, and potential liabilities for the use of copyrighted material to train models.

Our thought bubble: OpenAI's investors aren't contributing to a charity. The company was founded as a nonprofit, but has steadily moved toward a for-profit structure since Altman became CEO in 2019.

• Investors in this round have the right to ask for their money back if the firm doesn't complete further governance changes in the for-profit direction within two years.

Microsoft may not need to see a quick return on its dollars, since most of the money it's putting into the company is coming right back to it — as OpenAI pays the company for its cloud costs.

• But everyone else who has put cash into OpenAI expects to see profits. Right now, the profits are still somewhere over the horizon.