Eric Sundheim is an Accredited Senior Appraiser (ASA). He has completed more than 750 opinions and valuations for the purposes of M&A, tax reporting, and financial reporting. He has been engaged as an expert witness in valuation and damages and appointed as a business appraiser by judges in California § 2000 dissolution cases. His work has been published in premier valuation journals, and he is a reviewer for the Business Valuation Review. He has presented as a guest lecturer on valuation before universities, CPA associations, and bar associations, and his courses on valuation have been sold by data providers including Business Valuation Resources, Udemy, and Forbes. Mr. Sundheim has received security clearances from the Internal Revenue Service (IRS) and Canada Revenue Agency (CRA) and formerly served on the ASA NorCal Board of Directors.

What are your overall thoughts about OpenAI raising $6.6B and achieving a $157B valuation?

Eric Sundheim: My initial thought was that a lot of the team is leaving, so what are investors buying into? Much of the attraction for OpenAI is its position as first to market. But being first to market is a lot less meaningful in an industry with rapidly developing technology that quickly becomes obsolete. I'm reminded of companies like Netscape and AltaVista, which were first to market and, at one point, had high valuations.

Is the valuation over the top?

Eric Sundheim: That’s hard to say. AI is a multi-trillion-dollar market, and some believe that there will be one large AI that wins the entire market. Some of the hyperscalers are saying they can't even think about ROI because there's going to be such a large return, and it’s an existential game to win. If you believe OpenAI can be that “one AI that rules them all,” then it's a good investment. For my money, if there is a dominant AI, I think it’s much more likely to come from one of the other hyperscalers or some entrant we haven’t heard about yet.

As appraisers doing valuations for taxes or accounting, we have to value assets as the market is valuing them. In the dot-com boom, companies were being valued, not on financial metrics, but on a multiple of users or subscribers. Investors weren’t able to map out the monetization, but they hoped these non-financial metrics would turn into profit at some point. The fundamental idea behind those valuations was that the Internet was going to change the game. But with market maturity and monetization so distant in the future, it was hard to envision how that would happen. In that landscape, it’s hard to know which company is going to emerge victorious.

With AI, there is over-hype in the short term and under-hype in the long term. It's hard to imagine all the different applications of AI, and where cost savings or increased revenue will come from these tools.

Let’s dive deeper into the exodus of OpenAI executives.

Eric Sundheim: It's very common to see a lot of turnover in Silicon Valley, but not when a company is on the verge of a $150 billion valuation. That's not the time to leave, so to lose all that team just indicates a lot of internal chaos and upheaval. We saw Sam Altman ousted and then reinstated. We saw OpenAI’s chief scientist Ilya Sutskever leave and co-found Safe Superintelligence, which raised $1 billion. Former CTO Mira Murati is raising funds for a new startup.

The departure of Murati was huge. The CTO is often the CEO for an innovative technology company. It’s the engineer who often starts the business and governs the product. Before her departure, many staff members grumbled about the o1 model being released prematurely. The fact that OpenAI felt they had to rush this version out the door is indicative of just how tenuous their grasp is on their market leadership position.

OpenAI maintains its existing data and models, and that’s meaningful, but these models need to progress. You need a team to move the company forward. Perhaps OpenAI can find different or even better people. But one of the things we look for when we do any valuation is turnover in the management team. Are they all leaving for the same reason? Is the departure coordinated? Coordinated departures are a great concern from an valuation perspective.

There are hundreds of valuation methods but all can be broken down into two fundamental principles: risk and return. I wouldn’t say the potential for return is materially impacted by OpenAI’s departures, but the risk of achieving it is greatly elevated.

How does a company implode internally?

Eric Sundheim: Culture is key to a business. If you joined OpenAI to further the nonprofit aims alongside Sam Altman, and now all of a sudden you view your job as making Sam Altman rich, then that’s going to demotivate you. Just now the New York Times reported that former OpenAI researcher Suchir Balaji says OpenAI broke copyright law.

This change of focus will also impact OpenAI’s talent search. They’re now competing with hyperscalers for people earning over a million dollars a year, not to mention former OpenAI employees. It's hard to know what's going to take place with this company. But it’s not a good sign that they are turning over lots of talent in a market with a fairly limited human capital pool.

Given OpenAI’s valuation, what does this mean for companies and investors moving forward?

Eric Sundheim: We do have several AI clients, and I had a call with one the other day who wanted to get his valuation done very quickly. There was no specific transaction in the pipeline, rather, AI is so hot right now that he simply expects unsolicited offers to come in soon. When companies start viewing the market as excessively ripe for capital raising, that’s a good indicator of a bubble.

At the top level, there’s so much interest because of the base AI model’s rate of evolution. A lot of tech companies apply non-AI models to create a new application for, say, customer service or sales. But the base AI model will probably be able to serve that use case before a company is able to develop the new application. The base AI model will be able to do just about everything and eat up a lot of concomitant potential.

What other AI companies, either startup or established, are you watching closely and why?

 I'm very interested in the investments Google is making with AI. Search is critical to Google's success, and AI is on its way to supplanting search as the default internet query. Google should be in the best position to evaluate the most promising AI technologies for queries.

AI companies have raised $18.9 billion in Q3, or 28% of all VC funding. Are we looking at another bubble?

There are certainly indications of a bubble. Many of the founders I know expect their next financing to come in soon, and they are eager to close at today's valuations. I almost think of this dynamic as "insider trading," where the people that know the company best know when to sell. 

I should also make the point that it is difficult to classify AI as an industry. AI/ML touches many sectors of the economy. It's not the case that investors are putting money in AI that could instead be put into healthcare or fintech. By investing in AI, they could be investing in all three industries.

OpenAI was one of six AI funding rounds over $1 billion this year. With sky-high valuations, how do investors hedge their bets or manage expectations? 

Diversification is always a sound investment principle. Again, given the multifaceted impact of AI, some of these investments are inherently diversified. Investors should also consider only providing the amount of capital necessary to get their AI investments to the next milestone. Using tranched investments can prevent over-investment in companies and technologies that don't pan out.