How SoftBank Is Financing Its Massive OpenAI Bet: The Debt Dilemma

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Global technology investor SoftBank Group plans to use debt as a familiar method to finance its $40 billion investment in OpenAI, the company behind ChatGPT, according to an announcement made late Monday.

The firm, headed by millionaire Masayoshi Son and based in Tokyo, anticipates securing its initial $10 billion portion of the agreement through loans obtained from Japan’s Mizuho Bank as well as other financial institutions, with plans for this tranche to conclude by April. As for the leftover $30 billion, they aim to have it finalized by early 2026.

This agreement represents easily the biggest financial commitment made to a startup in history. values OpenAI At $300 billion assuming all funds are invested.

The bet

Alongside SoftBank's commitment to head the $100 billion initiative, Stargate cloud-computing initiative With OpenAI, this investment represents a significant gamble on the AI startup. entwines the fortunes from SoftBank with an entity anticipating substantial financial losses for many years ahead.

The aim is for OpenAI to become the frontrunner in disseminating artificial intelligence across society and business—a sector many anticipate could be valued at trillions annually.

SoftBank stated in a release that the "information revolution has now advanced into a new stage driven by artificial intelligence," referring to OpenAI as their "closest partner to attaining Artificial General Intelligence." This achievement would enable computers to function at human levels.

(OpenAI has a content-licensing agreement with News Corp, which owns The Wall Street Journal.)

The risks

SoftBank is assuming significant risks for a stake in OpenAI.

Ratings agency S&P Global said Tuesday that SoftBank’s “financial condition will likely deteriorate” as a result of the OpenAI investment and that its plans to add debt could lead the agency to consider downgrading SoftBank’s ratings.

None of the initial startups in generative AI have demonstrated profitability so far, and this industry is investing tens of billions of dollars into data centers under unproven assumptions about a future where AI quickly spreads across the world.

Many early technology leaders frequently stumble, as evidenced by SoftBank’s experience when they wagered during the dot-com era thatYahoo would reign supreme in search engines.

The background

Debt has frequently accompanied Son’s high-risk approach. The CEO took on substantial debt to facilitate the company’s successful acquisition of Vodafone’s Japanese division as well as the semiconductor design firm Arm.

More recently, SoftBank has been making moves. licking its wounds From investing tens of billions of dollars into startups right before their valuations dropped sharply in 2021, Son consistently stated that SoftBank would adopt a defensive stance.

Now that SoftBank has shifted focus to an offensive strategy, it has increased its expenditures significantly, including a $6.5 billion acquisition of chip startup Ampere.

As of December 31, SoftBank possessed a substantial cushion of $31 billion in cash; however, the firm intends to keep a significant portion reserved to ease concerns among anxious investors. The company has made a pledge not to use more than 25% of the total value of its assets as collateral for borrowing purposes. Consequently, this may necessitate divesting portions of its portfolio to finance the remainder of the OpenAI transaction.

SoftBank stated it anticipates that $10 billion out of the total $40 billion investment in OpenAI will be sourced from various other investors. In order to release the remaining $30 billion portion of this funding, OpenAI must transform into a profit-driven entity, as per reports from The Journal. Should they choose not to do so, SoftBank remains obligated to cover the $10 billion amount, according to SoftBank’s declaration.

Send the letter to Eliot Brown. Eliot.Brown@wsj.com and Kosaku Narioka at kosaku.narioka@wsj.com

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