Could Microsoft Make Half a Trillion Dollars from the OpenAI Deal?

As I understand the terms of the OpenAI & Microsoft deal, Microsoft has the potential for $500B in revenue as they work through the deal ladder to satisfy the terms and return all of the equity to OpenAI.

Here are the terms the deal: 

• Microsoft must earn back their investment in OpenAI; $1B in 2019, $2B in 2021, and $10B in 2023 for a total of $13B.

The Microsoft profit ladder:

• Phase 1:  Microsoft gets 75% of the profits until they recover the $13B investment.

• Phase 2:  Microsoft then gets 49% of the profits until they recover $92B.  Microsoft then reverts their shares to OpenAI and has no position.

So, if we work through this ladder:

• Phase 1:  To get to their $13B, Microsoft must earn 13 / 75% or $17.3B. Microsoft gross margin ranges from 35% to 69%, so, we’ll go with 50% to keep the calculations simple.  That would mean that Microsoft would need $34.7B in revenue to get through Phase 1.

Revenue from Phase 1 = $34.7B

• Phase 2:  To get to $92B in revenue at 49%, that is $188B. Again, using a 50% gross marking, then the total revenue would be $376B

Revenue from Phase 2 = $376B

Total Revenue:  $411B

Many details have not been communicated, but if the generous 50% gross margin was actually slightly less desirable, for example, 41%, you are looking at total revenue of $500B or half a trillion $$ to work through the ladder.  Of course the deployment of OpenAI capabilities could also be massively profitable and result could be less, say, $250B in revenue. 

Microsoft’s total annual revenue for FY2022 was $198B.  

Any way you slice it, the potential bottom line impact to Microsoft is significant.  And OpenAI gets an instant sales channel, one of the best in the business, and unlimited compute.  Microsoft will have, at a minimum, maintained parity in AI solutions on their platform if not gained a leadership position.  Likely a new deal would be negotiated as the terms of this deal are worked through, over 5 years or so, unless Microsoft doubles their revenue for next year.

As we have seen with Microsoft’s rapid CoPilot and Bing execution, they seem to be on their way.  Go Satya and thank you Sam. I hope the Microsofty who orchestrated this deal was properly compensated. I do believe that corporations and startups can't prosper together.

Reference:  https://fortune.com/2023/01/24/whos-getting-the-better-deal-in-microsofts-10-billion-tie-up-with-chatgpt-creator-openai/

Why are there so many corporate accelerators?

I was on a “Rise of the Accelerators” panel recently in San Francisco with Justin Kan (Partner at Y Combinator) and Thomas Forte (Founder at AngelPad).  One of the questions was “Why are there so many accelerators?”, and more specifically, corporate accelerators and I wanted to provide some data behind my response.  Fundamentally, innovation is driven by three investment sources.

·         Entrepreneurship (Venture):  Founder, innovators, dreamers, brilliant and crazy all at the same time.  The capital driving today’s entrepreneurship comes from venture capital, angel investors, the founders of respective companies and if bootstrapping, from the business themselves.

·         Corporate Backed R&D:  These are the guys in lab coats, I always think of IBM Research, when they announce the ability to assemble machines atom by atom or the latest.  Many great breakthroughs from history have come from far reaching corporate research.  But the ability to go from R&D to money making products has been challenging in the last few years.

·         Government Backed R&D:  This could be academic grants, defense research, major programs like energy or space, and even startup funding through programs like the NSF SBIR Grants.

I’ve been working in the interface between major corporations and startups for over a decade and if there is one thing I’ve learned is that corporate R&D never moves from concept to product as quickly as a great entrepreneurial team.  With respect to academic research, when it is fed into either corporate R&D or a great entrepreneurial team, I will place my bets on the entrepreneurs. 

The world has changed since you had to leverage economies of scale to drive innovation in large well-funded R&D labs.  Most of the tools required to move fundamental research into products is available on the web, or through easy to access services, such as 3D printing.  The cost of experimentation and iteration, whether that’s a big data scaled analytics solution or fabricating machines, has fallen dramatically.  And the methodologies that entrepreneurs are applying such as Lean Startup and User-Centered Design have grown around small, founder driven startup teams.

Corporate accelerators allow companies to bring a group of talented entrepreneurs together and focus on creating products for delivery in months where most corporations would take years.  Granted these products are not ready to “scale” like some corporate products may be, but the entrepreneurs can build a solution, test it with consumer, get market feedback and make adjustments much quicker.  So, innovations being driven from corporate accelerators can be more effective than classic R&D.  Corporate mentors share what they know, expertise in their business, in the domain of the corporation, and the entrepreneurs move fast to build and test products based on the latest technology and innovations.

I often hear the question, when will it end, or slow down.  So here is a quick comparison.  Here are the top 5 R&D budgets for global corporations in 2013:

·         Volkswagen       $12.5B

·         Samsung              $11B

·         Microsoft            $10.4B

·         Intel                       $10.1B

·         Toyota                  $9.3B

So, just across the top 5 R&D budgets in one year, these corporations spent $53.3B.  Summing up across the top 2,000 global firm, the total R&D spend is $670B. 

Of course, the government can’t be left behind, in 2013, the total US R&D spend was $132.5B, primarily across the top 6 categories of defense (half), health, space, general science, energy and natural resources.  And that’s just the US, Europe is investing heavily with $333B in R&D investments 

Global Venture Capital investment in 2013 was $48.5B worldwide.  An order of magnitude less than just the top corporate R&D, but delivering many of the new experiences and products that we use every day. 

I believe that over time, more corporate R&D money will shift towards strategic investments in startups and towards corporate accelerators.  If corporate accelerators are properly managed, allowing the startups to thrive at their best and attracting the very best venture capital, then for delivering product, nothing can deliver like a talented, driven, heavily motivated entrepreneurial team.

Kinect Accelerator: MentorStars help the companies and themselves

We are one third of the way through the Kinect Accelerator and the first month of mentor introductions and the companies have adjusted their business and technical strategies to line-up with the best opportunities.  Kinect development is challenging, so although it’s OK to fail-fast and learn from it, it’s even better to get pretty close on the first shot. 

This is the first Microsoft Accelerator we have run here at the Microsoft Westlake offices and it was not clear how engaged both the external mentors being brought in by TechStars and the Microsoft mentors would be.  We have been impressed by both.  The 11 Kinect Accelerator teams have been meeting daily with mentors.  Some of the actively engaged non-Microsoft mentors have been Adam Doppelt from Co-Founder UrbanSpoon has been active, David Cohen, CEO of TechStars (of course), Greg Gottesman from Madrona Venture Group, Andy Sack, Executive Director of TechStars Seattle, Kwindla Hultman Kramer, CEO of Oblong Industries ( the guys who designed those cool “Minority Report” scenarios) and the ever present and engaged Robert Kapela.   One mentor mentioned seeing this kind of innovation was like getting an adrenaline shot in the brain (that’s a good thing).

From the Microsoft side I have been truly impressed by how my peers have been engaged.  Dan’l Lewin, Corporate Vice President for the Microsoft Emerging Business Team reflected upon his own startup experiences and gave a compelling presentation that I’ll summarize as:

·         Know your customer, deeply.

·         Know yourself, as an entrepreneur, your strengths and especially your weaknesses.

·         Know your team, and get your team ready for some tough but rewarding work.

Many others across Microsoft have been visible on a weekly, even daily basis.  From leading game developers such as Jeff Matsushita and Rick Martinez, both Executive Producers at Microsoft Studios, Craig Eisler, General Manager for Kinect for Windows, Dennis Schmuland, Chief Healthcare Strategy Officer, many from the Kinect for Windows team, Steve Seow for Azure, as well as Sam Rosenbalm, Sr. Director for BizSpark and Microsoft Accelerator programs.  The Microsoft teams have been very engaged and responsive, helping connect Accelerator companies to customer prospects, transferring industry knowledge, providing best practices on Kinect development, responding to development tool issues, etc. 

Honestly, this first Microsoft Accelerator has been a bit of an experiment.  But the quality of the program has been consistent with the core TechStars programs.  The mentor intensive approach has driven the teams to mature quickly, refine their product vision, comprehend technical barriers and opportunities and allowed these 11 companies to do more faster.  Microsoft teams, even outside of the Kinect arena have been engaged.  For example, we needed more PC’s for the Accelerator teams for dev and test, the ask went out through multiple channels and loaner equipment started flowing in; monitors, workstations, keyboards, etc. 

Mentors, as they get engaged, learn as much from the companies and the process of support as the companies are learning from them.  Our MentorStars are learning and helping at the same time.

What your startup can learn from the Deepwater Horizon disaster

Last Thursday night I went to a lecture at the CU engineering school with my friend Nathan Amack (Nate’s a senior in ME at CU).  I always wanted to get the real story on what actually happened during the Deepwater Horizon disaster, not the ecological outcomes and the blame game, but actually what happened.  Unfortunately, mainstream news media does not cover the technical details of disasters like these because, well, the technical details aren’t mainstream.  To me, it was better than a blockbuster action movie.

The Deepwater Horizon is the drilling rig.  It’s actually a ship, and a very new one, with the top technology in the business.  The technology in the oil business is the top technology in the world, better than even most military applications, nothing is like it.  When I was working on the B2 I was building some super high pressure hydraulic systems, 10,000 psi +.  Complaining to some fellow engineers that I could not find any parts from the usual aerospace suppliers, one of them reached into their drawer and pulled out a supply catalogue for oil exploration, and everything I needed was there.  Ok, Back to the Deepwater Horizon, its big.  Take 4 aircraft carriers and strap them side by side, and put a 10 story office building on top, and that’s how big.  And the well was deep; one mile of ocean and two more miles of drilling.  18,000 feet.

The leader of the Congressional committee which investigated the Deepwater Horizon disaster was Donald Winter, a former Secretary of the Navy, President at Northrup Grumman and CEO of TRW.  Mr. Winter was a no BS engineering manager.  I had gotten to know the type when I was at Boeing on larger projects.  The Deepwater Horizon was done drilling oil.  They had struck oil, the oil well is known as the Macondo oil well, and the crew was in the process of sealing the well.  Essentially, you build a big cork out of concrete, by pumping cement into the well, and cap off the well.  You put the cork in and you test to make sure if the cork is going to stay.  The cork was in and the crew was in the middle of testing to see if the cork was going to hold.  Imagine pressing the cork back into a Champaign bottle.  Before you put it back into the fridge you make sure that cork is going to stay in by pressing on it and seeing if it moves any more.  If not, your good.  If it does move, well, you don’t take your finger off or it will pop.  The Deepwater crew too their finger off the cork, the Macondo well popped, and all hell broke loose.

Kobojo raises $ 7.5 M to go global in social gaming

So, you have an idea, a dream, to build a gaming company, but how do you move that dream to reality?   You contact a few buddies, put together a team, and enter the Imagine Cup competition.  You take your team down to Sao Paulo, Brazil, and you win the 2004 Imagine Cup.  You join BizSpark and get all the tools and product platform to build your product and host it with little cost.  You tune your games towards an emerging trend of simpler, social games and partner with Facebook to leverage their social graph.  You get engaged with your local BizSpark ecosystem, specifically for Kobojo, the IDEES de Microsoft program in France, and you grow your company with mentor and technical support.

Now, your company is getting traction and you need to raise some funding, so you start engaging with venture capitalists and you enter the pitch competition at the 2010 European BizSpark Summit in Paris.  And you win it.  More attention, more eyeballs, more opportunity.  Your company has some great games out in production, the Goobox full of casual games, and Robotz, a social community game built on Facebook and hosted on the Windows Azure cloud infrastructure.  Some things work great, some not so great.  Some popularity results in revenue and some results in wasted time.  But you push your company ahead, you take help when it is offered and you direct your company towards your vision.

Now your dream is getting a reputation.  In some circles Kobojo is being called the Zynga of Europe.  Your company is featured as the BizSpark Startup of the Day and you get a little more visibility globally.  Then through the IDEES program Kobojo gets nominated into BizSpark One, the global showcase for the top 100 of the nearly 40,000 companies in Microsoft’s global BizSpark ecosystem, and you get in.  More global visibility and then Microsoft corporate engagement, which results in Kobojo being showcased at the 2011 International Consumer Electronics Show .  Here the addictive Kobojo game, PyramidZ is on the Windows Phone 7 and on the latest Windows 7 touch-enabled PCs and slates.

And now, Kobojo has raised their first round of $7.5 M, press release, as reported on TechCrunch, to build out their casual games on Goobox and to build out their popular global social game PyramidVille.  They have grown to 30 employees and are growing internationally with the help of their investors.  The Kobojo team members, Franck Tetzlaff, CEO, my friend Vincent Vergonjeanne, VP of Products & Strategy and Guillaume Berthet, CRM & Partnerships Manager, have created a successful and prospering company from their dreams and many years of hard work and exceptional execution.  I can’t wait for what is next.  It will be fantastic.

Need some seed funding? How about the US Government… NSF SBIR Grants

It’s tax season and I just wrote a large check to the US government.  I often wonder exactly where my money is going, some MRE’s for a soldier hoofing it in Afghanistan, a new trail in Rocky Mountain National Park, or a shrimp cocktail on Air Force One.  But once small slice of my tax check goes to the National Science Foundation, and an even smaller slice of that goes to the Small Business Innovation Research (SBIR) fund. 

Last week, I had the honor or helping our federal government give that little tiny slice of my tax check to some very well deserving startups.  The intent of these grants is "to provide funding for some of the best early-stage innovation ideas -- ideas that, however promising, are still too high risk for private investors, including venture capital firms."  This is goodness.  I have been engaged with the Venture Capital community long enough to know that they take calculated risks.  Investing in technology or products that are clearly innovative, but don’t have a near term potential for massive growth is something that most VC’s, and most angels for that matter, avoid.  But then you say, why should anybody invest, just wait until the market is ready.  Well, sometimes technology needs to evolve a bit until the commercial application becomes apparent. 

Some examples of successes from the NSF SBIR program – the bar code, the technology behind CDMA (Qualcomm, Verizon), so now you can check-out by yourself and make cell phone calls that don’t drop.  But the NSF continues to press the envelope.  My participation is part of the grant review process where industry and academic professionals are brought together as a panel to help review the proposals.  From academia you have scientists that understand the core technology being presented, and to some degree, how their education programs can develop more technology around what is being proposed.  From the private sector, VC’s, entrepreneurs and corporate venture folks like me, help decide whether the technology can be brought to market, whether its commercially viable and if the business management in place has a chance.  It is a well run process, and one that does select the right proposals.

The competition is tough to get an NSF SBIR grant, so you need to be on your game and it is more of a documented proposal than you may be accustomed to with most VC pitches.  But these are grants, so you do not have to commit any of your company’s equity to the US government.  If you execute against the milestones, you get your payments, and you can grow your company as you see fit.  There are 3 phases that are available.  SBIR Phase I grants are typically from $50,000 to $100,000 and is essentially seed capital for your idea.  SBIR Phase II grants are proposed based on successful execution of your Phase I grant and is essentially an angel round to get the company functioning or launch the product deeper into the market.  Phase II grants can be up to $500,000 but can include up to an additional (Phase IIB) $500,000 to match private investment if it is acquired.  The goal of Phase II is to develop the technology, company and product to the point that private investors will fund the company to prosperity from there.  Do you want to apply – go here: http://www.nsf.gov/funding/preparing .

Hey, now, every tax payer has just a little bit of angel investor in them. 

I’m good with that.

The Art of the Demo

In my career I have seen hundreds, perhaps even more than a thousand demos.  From the elevator demo, literally, in the elevator, on somebody’s iPhone, to the two hour, every mouse-click of the application, “I’m so proud” demo.  Honestly, I like demos.  I like them more than most other presentation content or style.  You learn a ton about a product, the company, and even about the people presenting the demo.

I have also written a few, designed quite a few and presented many demos – mostly in my time at Great Plains.  When I was at Great Plains we cooked up one particular demo that was presented to the largest live audience in history, at the time, and then went on to be deployed as a sales demo to thousands of Microsoft sales personnel.  This was before Microsoft acquired Great Plains when I was working at Great Plains running the tech platform activities.

But first, we need to categorize the types of demos that you may need to perform, just like the different types of presentations you may perform.

·         The Elevator Demo:  So easy, so portable, that you can do it in an elevator.

·         The DEMO Demo: 6 minutes, soup to nuts, you pitch the product, and the company.

·         The Show Case Demo:  Lights, camera, action – grab the ooh, the ah.

·         The Sales Demo:  It’s gotta close the deal.  But be careful, because it’s gotta work too.

·         The Acquisition Demo:  It’s about the company, but shown through the app.

Just like any presentation, a good demo is aimed at the audience, with the intent of eliciting some response from that audience, or a key member of that audience.  It is theatre and follows the same premise.  When you start the demo, people have to get what you are talking about, and really get it.  If you start off with some kind of complicated set-up, the audience will be lost before you even begin.  Just like a great song, you build up slowly, keep everybody comfortable, engaged, wondering, and then you get to the payload.  The core of what the product or service does.  That the audience gets it and can remember.  There may be, and usually are, many technical details in why the demo is even working, but don’t explain it.  Keep the audience wondering, but keep them believing.

Then there is the close, and in any demo, or any format, you need to close with something that is sticky, that resonates.  It may be glitzy, an animation, even gimmicky, but it has to fit, don’t go too far.  One of the most memorable demos was a company that graduated out of TechStars in Boulder in 2007.  That’s literally 100s of demos ago for me and I still remember it.  Search-to-Phone allowed a user to call one phone number, ask for a service, and that service would be broadcast to dozens of service providers.  So, in the demo, the CEO of Search-to-Phone, Carmin Turco, picks up his cell phone, dials the Search-to-Phone number, and asks for an Elvis impersonator.  The system sends out the inquiries, and connects Carmin with a service provider that can deliver.  Carmen negotiates the rate, on the phone, in front of the live audience, and closes the deal.  Carmen closes the phone and then you hear a guitar strumming outside and through the door walks an Elvis impersonator.

Search-to-Phone did a variety of deals and is private labeled in different web applications.  A great demo does not necessarily mean that your company will be the next Facebook, but it gets you noticed, and is worth all the time and effort.  Perhaps more so than all the effort you put into that killer PowerPoint deck.

My guidance on how to do each of the types of demos I described will be coming next.