Five weeks ago, San Francisco’s artificial intelligence lab OpenAI released ChatGPT, a chatbot that answers questions in clear, concise prose. The AI-powered tool immediately caused a sensation, with more than one million people using it to create everything from poetry to high school term papers to rewrite Queen songs.

Now OpenAI is in the midst of a new gold rush.

The lab is in talks to complete a deal that would be worth about $29 billion, more than double that in 2021, said two people with knowledge of the discussions. The potential deal – where OpenAI would sell existing company shares in a so-called tender offer – could total $300 million, depending on how many employees agree to sell their stock, he said. The company is also in discussions with Microsoft — which invested $1 billion in it in 2019 — for additional funding, the two people said.

The clamor around OpenAI suggests that even in the most dismal tech downturn in a generation, Silicon Valley’s deal-making machine is still kicking. After a humbling year that included massive layoffs and cutbacks, tech investors — a naturally optimistic bunch — can’t wait to jump on a hot trend.

No field has generated more excitement than generative artificial intelligence, the term for technology that can generate text, images, sounds and other media in response to small prompts. Investors, pundits and journalists have talked of artificial intelligence for years, but the new wave – the result of more than a decade of research – represents a more powerful and more mature breed of AI.

This type of AI promises to reinvent everything from online search engines like Google to photo and graphics editors like Photoshop to digital assistants like Alexa and Siri. Ultimately, it could provide a new way to interact with almost any software, allowing people to chat across computers and other devices as if they were chatting with another person.

This has sent deal-making around generative AI companies into overdrive. Jasper, a generative AI start-up founded in 2021, raised $125 million in October, valuing it at $1.5 billion. Stability AI, an image generating company founded in 2020, raised $101 million in the same month, valuing it at $1 billion. Smaller generative AI companies, including Character.ai, Replika and U.com, have also been flooded with investor interest.

According to data from PitchBook, in 2022, investors will invest at least $1.37 billion in generative AI companies across 78 deals, more than they invested in the previous five years combined.

OpenAI had a $29 billion valuation informed earlier by The Wall Street Journal. Venture-capital firms Thrive Capital and Founders Fund could buy shares in the tender offer, two of the people said. Because OpenAI started as a non-profit company, it is difficult to accurately evaluate it.

OpenAI, Thrive Capital and Founders Fund did not comment on the proposed investment.

Companies have developed generative AI over the years, including tech giants like Google and Meta, as well as ambitious start-ups like OpenAI. But the technology didn’t catch public attention until last spring, when OpenAI unveiled a system called DALL-E that lets people generate photo-realistic images by simply telling them what they want to see.

This prompted entrepreneurs to dive in with new ideas and investors to announce the disruption was widespread. Their enthusiasm reached new highs after OpenAI released ChatGPT in December, with fans seizing on the technology to generate love letters and business plans.

“This new ‘mobile’ is the kind of paradigm shift we’ve all been waiting for,” said Niko Bonatos, an investor at venture capital firm General Catalyst. “Maybe even bigger.”

Investors in Sequoia Capital wrote That generative AI “had the potential to generate trillions of dollars of economic value.” And Lonne Jaffe, an investor at Insight Partners, said, “There’s certainly an element to this that feels like the early launch of the Internet.”

Google, Meta and other tech giants have been reluctant to release generative technologies to the wider public because these systems often produce toxic content, including misinformation, hate speech and images biased towards women and people of color. But newer, smaller companies like OpenAI — less concerned with protecting an established corporate brand — have been more willing to get the technology public.

The techniques required to build generative AI are widely known and freely available through academic research papers and open source software. Google and OpenAI have an advantage because of their deep pockets and access to raw computing power, which are building blocks for the technology.

Nevertheless, several top researchers at Google, OpenAI and other leading AI labs have in recent months discovered new start-ups in this area on their own. These start-ups have received some of the largest funding rounds, plus the excitement around ChatGPT and DAL-e has inspired venture capital firms to invest in even more young companies.

Over 450 Startups Now Working on Generative AI counting a venture capital firm, And in an atmosphere of gloom, the frenzy has been fueled by investors’ eagerness to find the next big thing.

Michael Dempsey, an investor at venture firm Compound, said the tech recession — which included a crypto crash last year, underperforming stocks and layoffs at many companies — has created a lull among investors.

Then “everybody got excited about AI,” he said. “People honestly need something to tell their investors or themselves that there is the next thing to get excited about.”

Some worry that the hype around generative AI has outweighed the reality. The technology has raised thorny ethical questions about how generative AI might affect copyright and whether companies need to obtain permission to use the data that trains their algorithms. Others believe that big tech companies like Google will quickly outnumber young upstarts, and that some new companies will have little competitive advantage.

“There are a lot of teams that don’t have any AI capabilities that are positioning themselves as AI companies,” Mr. Dempsey said.

Those concerns haven’t slowed the swelling of enthusiasm, following the advent of sustainability AI in October.

The start-up had helped fund an open source software project that quickly built image-generating technology that operated like a DALL-E. The difference was that while OpenAI only shared DALL-E with a small number of testers, the open source version of Stability AI – Stable Diffusion – could be used by anyone. People quickly used the tool to create photo-realistic images of everything from a medieval knight crying in the rain to Disneyland painted by Van Gogh.

In the ensuing excitement, Eugenia Kuyda, founder and chief executive of chat bot start-up Replica, said in an interview that she had been approached by “every VC firm in Silicon Valley,” or more than 30 firms. He took their call but decided against additional funding as his company, founded in 2014, is profitable.

“I feel like someone who got to the airport a week ago for a flight – and is now boarding the flight,” she said.

The companies said Character.AI, another chat bot company, and You.com, which is adding chat technology to its Internet search engine, have also attracted venture capitalists.

Sharif Shamim, an entrepreneur who in August created a searchable database for images called Lexica by Stable Diffusion, said his tool quickly hit a million users — a sign that he needed to expand his existing start-up. From should focus on lexica. Within weeks, they raised $5 million in funding for the project.

Mr Shamim compared the moment around generative AI to the advent of the iPhone and mobile apps. “It seems like one of those rare opportunities,” he said.

Mr. Jaffe of Insight Partners said his firm has since encouraged most of its portfolio companies to consider incorporating generative AI technology into their proposals. “It’s hard to think of a company that couldn’t use it in some way,” he said.

Radical Ventures, a venture firm in Toronto, one of the global centers of AI research, was created five years ago specifically to invest in such technology. It recently launched a new $550 million fund dedicated to AI, with more than half of its investments in generative AI companies. Now those bets look even better.

Jordan Jacobs, Radical’s partner, said, “For four and a half years, people thought we were crazy.” “Now, for the last six months, they’ve thought we were geniuses.”

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