Apple Lawsuit Threatens OpenAI IPO Plans and Microsoft CEO Issues Warning

Apple sued Open AI and OpenAI is starting to push back. Also this week, Microsoft Sacha Nadella had a surprising warning about AI and we're keeping our eye on a couple of deals this week, including why General Catalyst just gave David Beckham $1 billion. Hello and welcome back to Equity Techrunch's flagship podcast about the business of startups. I'm Kirsten Cororsk, transportation editor here at Techrunch. And I'm joined as always by our weekend editor, Anthony Hot, and senior reporter plus special projects, Sean O'Ne. And I'm wondering, aside from all the sports, which I know you guys aren't watching, what are you working on professionally? I just got back from a science fiction convention, so I'm just uh catching up on everything on every

especially since we didn't uh have a news wrapup uh episode last week. I feel very behind, but I'm I'm rapidly getting caught up. Yeah, I'm trying to figure out what this whole soccer thing is. Yes, for our audience, that is my slight dig with because I keep on trying to bring the World Cup into this and it is not going to happen. But I do want to ask a question to both of you which is not sports related. And Anthony, I'm wondering, do you want Sam Alman to be listening to you? Yes or no? Um, no. I mean, depending on what we mean by listening, listening to me in the sense that when I say something he does is bad, he should listen. Sure, of

course he should listen to me. But in the sense of eavesdropping or using my data or stealing industry secrets, not that I have access to many, I would say not so much. Um, which I guess this is going to color multiple themes that we're going to be talking about today. One being the high-profile uh lawsuit that Apple has filed against OpenAI. Yes, there's been a lot of news around OpenAI this week as always, but a couple of things that got the most attention. One, the company is working on what looks like a mobile screenless device that maybe you could just carry around in your pocket and will be like the next generation of compute and we'll be listening to you. Hence my question. But

also Apple has sued OpenAI and that is important for a number of reasons besides the fact that this is two giant tech companies, you know, that are potentially going to be in a very interesting trial with each other. Uh, so back to my question, Sean, with that context for our audience, how do you feel about Sam Alman listening to you with a little device maybe in your pocket? I'm good. And maybe that's predictable, but I'm good. Like, yeah, no thanks. I mean, like, yeah, we'll get into it, I'm sure. But this is allegedly the first product that Open has been working on in its hardware division with uh with Johnny Eye and company. you know, they've been really koi ever since that weird video they put out last year of them sitting uh, you know, at that

coffee shop or bar in San Francisco and sort of talking very vaguely about hardware and legacy devices, meaning laptops and phones. And if this is the direction they're headed in, you know, all power to people who want to have uh somebody like that sort of always listening to them. This is not going to be for me. Well, and I think part of what we have to remember about those kinds of devices is also that if you depending on how mobile it is, right, is that it's not just listening to you, it's listening to the people around you. And so, you know, I might be fine with it. I'm not fine with it. But let's say I was, but then if I if we met up in person at disrupt, then suddenly it

might be listening to all of us. And I feel like there's all kinds of, you know, social norms that are going to have to be renegotiated if these things become widespread. And I think we should make fun of and criticize people who record other people without consent. Well, I bring up the device that has been speculated about for a really long time actually and we'll see what it really ends up being once it's officially introduced, but it's important in the context of this lawsuit that Apple filed last Friday was, you know, the biggest news of the week certainly. And this is a trade secret lawsuit and it has some pretty wild allegations and we should very much emphasize these are allegations uh that

have been filed in a complaint by Apple. But really what it is accusing OpenAI of is a pattern of misconduct at the highest levels, specifically directed towards OpenAI employees who used to work at Apple. And in fact, they've named the chief hardware officer Tang Tan in this lawsuit. And this is all important because Apple's accusing open AAI of essentially stealing their trade secrets. But in the context that this could be then used for a competing hardware product. Maybe we don't get into like whether the this lawsuit has merits because we haven't gone through full discovery, but what are your initial impressions of the lawsuit aside from the fact that wow, this is going to be entertaining.

I mean, yeah, you nailed that. Uh, two things. one, this is, you know, a pretty big risk potentially to whatever it is OpenAI is working on. I mean, even setting aside whether or not the court grants any kind of like injunctive relief and or any kind of restraining order over what OpenAI is doing, it just naturally can lead to that sort of situation where it's going to cause some delays in what OpenAI is working on, which I'm sure was probably part of the reasoning behind Apple doing this. They don't do this stuff willy-nilly. They usually come when they feel like they have a case for this stuff. Uh the other is that we think that OpenAI is I mean we know that they filed confidentially for an IPO. We

think it might happen as early as the end of this year or early next year if you believe Sam Alman's sort of cautious language around the IPO. And this just raises a whole bunch of questions around that because you know on the one hand we think their business right now is probably overwhelmingly software. They're not really factoring in any hardware business into that picture at the moment, but like they're about to go to the markets and they're going to be pitching bankers and investors on where they think their addressable market should be. And if they have a big amount of that pegged to a potential hardware division and hardware products, this could be a huge risk to that and changes

a lot of the calculus of sort of how the IPO gets priced. So, that's where my head's at. Yeah. Yeah, I mean one of the things that also jumped out to me uh in terms of what Apple is claiming, which I don't think OpenAI has really commented on, I mean they've sort of broadly sort of denied, you know, the allegations. Um but one that I assume that Apple must have pretty solid like numbers on is they just said that I think like more than 400 Apple employees now work at OpenAI, which I you know, granted both of them are very large companies with, you know, many thousands or tens of thousands of employees. So like as a percentage it's not necessarily huge but that seems like a lot of people in a pretty serious talent drain. And the other thing I'm

wondering is related to Sean's point uh you know with the context of the potential IPO is how much damage did OpenAI ultimately take from like a marketing and brand perspective from the trial it already went through that you know that it seemed to you know basically win but like there was a lot of kind of not terrible but kind of embarrassing like kind of dirty laundry that came out in like the testimony and to what extent are they just like we do not want to go through that again or did they sort of take the lesson of, hey, we like we went through it and we survived and we'll be okay if we have to do another trial with Apple.

Oh, I fully predict the latter, by the way. Okay. I think that they'll steamroll ahead. Um and the reason why I say that is because uh their comments publicly so far. they have been very careful with language and um this their most which is a little bit of an understatement and I'm going to read it but the recent statement which the company confirmed to me they say while we take these allegations seriously we're not aware of any evidence that this complaint has merit. That's a very interesting way to phrase that and it's not a non-denial but it is um a bit of a hedge and my big question to them which they did not answer is are you conducting your own internal investigation. I assume that they are.

And so the question is, is this just too many lawyers, you know, in the, you know, the kitchen, so to speak, and we got some lawyerly language in there, or are they unclear actually about what might have happened, and they're in the midst of finding that out? I think that how aggressive they are in the courtroom will come down to what they are about to find out or in the midst of finding out right now. And I will say circling back to the IPO, I think it could have some major implications to when this IPO actually comes about because the last thing you want is Apple suing you in the midst of that. I mean, Apple is still a massive company um with a you know trillion dollar market cap.

So, I think that OpenAI is going to want to resolve this quickly if it can um without admitting any wrongdoing. So, we'll see what that's like. I mean, I'm kind of wondering if it's going to be a little bit like the Whimo Uber trial back in 2017, which was super entertaining and gave us lines like laser is a sauce. And that ended up settling after 5 days. But it was interesting because it was directed towards a employee, Anthony Lewendowski, but he wasn't named specifically in the suit. So, we'll see if it mirrors that experience. One other thing to mention about that statement was that it was a slight almost like a tweak on the statement they were releasing before because initially they put out one statement that's sort of generic

boilerplate saying, "Hey, we're not interested in stealing anyone's trade secrets." And then they sort of upgraded the statement to say we're not aware of any evidence to back up Apple's claims. And so it's interesting to sort of imagine what the conversation was where you know clearly I we have to assume multiple people signed off and said okay like this is not that was you know the old statement. Now we need to like move to the new statement because it reflects some sort of uh new state of affairs. Even though to most people I would assume that if you know read the two statements you're like oh they're basically saying the same thing.

Um, I think the other thing that this reflects is also just again kind of an obvious point, but how the relationship between OpenAI and Apple has deteriorated in the last couple years that a couple years ago like you know ChachiBT was supposed to be a big part of the revamped Siri and that didn't really seem to work out and in and now of course they're potentially competing on the hardware side and so these two companies that seem to be kind of frenemies or even allies now it really seems like they're kind of preparing for allout war. Yeah, I want to say sort of my piece on that statement before I even get into that like I think this is like so many things like a roar shack test for how you feel about open AI. I think on the one hand,

no one has really uh I there aren't many people who are going to come forward and say, "Wow, this is a company that communicates really well and clearly." Uh they're they're you know, they're run by a person who is regularly accused of being sort of two-faced and not very uh forthcoming with his employees or with other people around him. And so I think those are things to take into consideration here. If I had to speculate, I read that statement as, you know, knowing how many hands probably got on that ball, the people who are in charge of protecting the company, aka the lawyers at all, leaving room in there for the company to, you know,

eventually back away from some of these claims that may wind up pinned a bit more on the employees who are named defendants. Uh, you know, you read through this complaint and I recommend people do if they haven't already. It's uh you know certainly it's coming from one side and one perspective and you always have to be careful about how even when things are quoted which looks damning how they are quoted what context is missing from those quotes etc. Take all that into consideration but it's you know it's a very specific lawsuit I've seen trade secret lawsuits in the past some even involving Apple that don't go as far as this one does. This is a heavily detailed complaint and so it

just makes me wonder how that plays out. The other thing here too is I think just to remember the dynamics. Whether or not OpenAI was directing people to do some of the stuff that's claimed in this lawsuit, whether or not these employees are actually doing these things, the pressures are there. I mean, there are so much pressure working against you as a software services company if you want to be distributed, at least in the United States. And you always have to go through Google and Apple. And with Apple, you're paying a lot of money, up to a third of your revenue that you're making in these transactions on the platform. And so for OpenAI to get to a point where they're, you know, maybe fed

up with how much money they're handing over for people signing up for Chat GPT when they're actually paying for it, building your own device and building your own ecosystem is not an easy way, but it's a way around all that. And so this again sort of gets in the way of that attempt, whether or not that attempt was ever going to be successful in the first place. Well, I wonder if uh it's time to move on to another topic in the theme of how much do we trust these AI companies and this is a statement from Satanadella, CEO of Microsoft and again of course like a close partner of OpenAI

although certainly some reporting around whether that relationship has seen some tension but he basically said hey actually you know be careful what information you are providing to these AI labs and that essentially he used this idea that when you pay for usage of these AI tools, you're essentially paying twice because you're paying for the token usage and you're also paying by handing your information over to these different labs. And um I'm curious what you guys made of that particularly why he chose to emphasize this message. Well, I do kind of find it a little bit ironic that like that Microsoft is issuing warnings about Trojan horses and you know basically monopolizing like all information is really the message here.

Um I will say that it's not a unique message. We're hearing warnings from others in the VC space, Palunteer CEO Alex Karp as well. So, um I think the surprising piece is that it's coming from Microsoft. Putting aside like a little bit of the irony, I do think that it is a valid and relevant point that he's making, which is and I think reflective of a change that is about to happen within the AI lab meets, you know, big tech company relationships. A lot of these companies wanted to be first. Microsoft, you know, had an early partnership with OpenAI. So, I think that there was a lot of like everyone jumping in and partnering up and sharing with like unabashed almost, you know, no

limits because they didn't want to be left behind. And now they're pausing to consider those acts. And I think that we're going to see more of that. And I think we're going to see companies like Apple and Microsoft starting to really try to do more of their own work in house because of these concerns. Yeah. I think the question here is like is he saying this now because those relationships have deteriorated a little bit and he would have said it before had they not been so reliant on each other or is he saying it now because there's like a specific reason and this is him sort of like you know wink letting people know that maybe something is going on and you know you need to sort

of protect yourself. I don't know the answer to that. I think it's maybe somewhere in the messy middle between those two or a combination of it. But I think that's the question. You know, I don't think anybody who's been using this stuff hasn't thought about this potential problem over the last few years. To me, really quickly, like the whole Trojan horse analogy is like very getting very close to what Apple ends up doing, which is filing a lawsuit about trade secret theft. Like the analogy of Trojan horse isn't a positive one, right? I mean, it's implying that they're they're masking their intentions. It's a act of subtrauge. So, I mean, when you read between the lines, actually, it's pretty strong

language. And so, I do wonder the same thing if there's if there is something that has broken within the relationship and if it's preempting some other kind of action that is stronger than a blog post. And I mean it's interesting to think also about what are the solutions that Nadella is sort of suggesting here which are of course I think in both cases somewhat advantageous to Microsoft they're they're you know self-s serving solutions. One being this idea of kind of reciprocity of that if we hand over our data to you to your models and your models are sort of then you're using that data to improve your models then we should get access to see sort of how that's improving your models and that and we can sort of use that in some way

ourselves as well we in this case being you know like the customers of these AI products um and the other was sort of the idea of this kind of like private learning environment on the cloud you know of course presumably the Microsoft cloud seems like a reasonable criticism reasonable solutions, but also no real suggestion of, hey, like if we're really worried about these kinds of security risks, then maybe we should be careful about like what information we hand over at all. Like that maybe we just shouldn't that certain kinds of sensitive information you don't want to give to these companies potentially.

Yeah. I mean, this is the latest example of a trend that feels recent, but is timeless as ever, which is he's probably talking his own company's services here, even though he's not specifically naming it. Like, you know, you'll be safer by building your own proprietary environment on Azure and not using, you know, going directly to these labs and interfacing with them directly. You know, I think people should take that into consideration. If I can stand on a soap box for a moment too, it is a little bit frustrating to see him make these claims when like this has been an argument about sort of regular people, customer data, and how it gets used and misused and sort of all of that over the last 15, 20 years as Silicon Valley

tech companies sort of rose to the prominence that they enjoy now. And you know, it's just a little as someone who looks at things like Citizens United looks at stuff like this, you know, I don't doubt that the corporations may get preferential treatment here as far as like how their data gets protected and their data gets warned against and their data gets thought about first versus the rest of us. It's like, you know, you back to we're back to Sam Alman listening to us and where that information might go. So, I'm wondering how either of you see companies dealing with this in real time. Like, it just seems like is this just everyone goes open source or is there some other

solution to the Trojan horse problem? My sense is that open source is going to be a big component of it and that again this is sort of somebody talking their own book but to Rebecca uh had a great interview with um Clem Dong from Hugging Face where I mean obviously his whole message is kind of around open-source AI and you know he was essentially arguing that yeah you know when you get started with AI you as a business you'll probably start with one of these big companies like Open AI or like Anthropic but at a certain point um because of cost more than anything else, you start to switch to a more open approach. And so it'll be interesting if you know both on cost and privacy

reasons that just adds to the list of reasons why you don't want to just get locked into using you know chat GBT or cloud potentially. I could at least see that happening. I don't really know where it goes honestly. I think like I said I think people were probably already considering some of this stuff. I think it would be wild if they weren't. Maybe that's just me coming from the perspective of very like lightly easing my way into using some of these tools and only in ways where I'm playing with, you know, publicly available data versus, you know, dropping source notes or anything into it. Like I'm coming from a position of like naturally being cautious and skeptical. Big freaking

surprise if you know me. But I don't know that like going in the open source route is necessarily going to be like a sav like or a catch-all that like fixes this problem. I think you still have to be worrying about where you know what sensitive data is going out there. This is like this also goes back to a conversation we've had a lot about around vibe coding where it's like there are benefits to distributed software that's built at scale with this stuff in mind. Like there are companies that have built entire fortunes selling enterprise software to companies and promising them whether or not that actually you know that promise gets seen out and if there's data leaks or data breaches or

whatever that like you are safe to put your most sensitive stuff in this environment. And so like maybe this just shifts that conversation in a way that enterprise customers start asking those questions a lot more upfront of these companies and maybe that actually slows some of this mania down a little bit. Yeah, I mean there is evidence and we've actually had some coverage of companies actually inviting labs like deeper into the fold if you will via forward deployed engineers and Rebecca Balon had a couple of interviews about this and she did a focus on talking with the leaders of Ode with Enthropic and it is this idea of like bringing enterprises deeper in deeper collaboration. So I

mean those are two very different um avenues right open source are like come on in um let's get even uh closer and it's hard to parse exactly which direction. I mean it's easy to say I think it's going to be mixed. That's a little bit of a copout, but I do think that I do think that there is going to be examples where there will be this big push for open source, but we will continue to see some companies, you know, absolutely tying themselves even closer to AI labs. The forward deploy stuff I find genuinely fascinating. It's like one of my favorite details I've come across in talking to a lot of like AI first startups over the last call it like two years if only because it's like so fun

to hear software engineers who maybe previously were working you know deep inside Uber in like a statistics division or at one of the social media companies just be genuinely excited to be like in a car dealership in the service bay, you know, trying to help them figure out what they might want from that startup and like that has just been a genuinely exciting thing to see develop because of how much passion some of these folks have really developed for these, you know, what are could be cast as niche businesses, but like that actual sort of boots on the ground work is fascinating to me. But the caution there, you know, sort of as you got is the more you're doing some of that stuff, you're also running into

like a softer risk when it comes to people who have their hands on data. Like it's kind of there's a line here back to OpenAI and Apple where the more people you're putting in between the labs and the enterprise customers, the more vectors you just naturally have for that data to be compromised. And so like they'll have to think about that as well. And you know I don't know where that goes. Yeah. This isn't necessarily a prediction, but it's a hope that I think maybe there's more conversation and awareness just of the trade-offs and risks involved in the same way that you know with the whole like token maxing conversation there's where it's

just like well it's it's all upside just use as many tokens as you can it's great and then at a certain like oh like this costs a lot of money um that I think that hopefully there's more conversation like oh like are we sure we want to do this with all of our data and then I think that can also lead to pressure um on the part of the big AI companies where to get access to all this enterprise data, we actually have to give like very clear guarantees about how we and explanations and best practices around how we actually use or don't use the data to train our models so people you know feel a little bit more comfortable with it.

Yeah, totally. You know, it reminds me that while all of these, you know, engineers, as Sean was highlighting, are like finally, you know, having this moment of working directly with all these other startups and probably working really hard. You know what they need is a health drink. And that is my pivot to our deal. Well done. To keep up that strength. I know our producer is really impressed right now. She's actually messaging me. David Beckham has a health drink startup called I am8 and you know I saw this story and I was like oh interesting what are we talking about like a seed round of like 10 million like oh no 1 billion

um but in an interesting way which is a general catalyst customer value fund and I was wondering if either one of you read this article from one of our actually one of our editors or if um it caught your Brian. Anyway, it absolutely caught my eye. I mean, it was just kind of like the same reaction that you had of like what and I think I mean, yeah. So, the startup itself is interesting and this deal is interesting because I hadn't heard about the customer value fund before, but it sounds like, you know, it's essentially uh debt. So, it's not an equity investment. Um, and a lot of that is going to be spending towards customer acquisition. So I think what that means is that if you have not heard of IM8 before, which I had not, you can

probably expect to see a lot more ads online for IM8 in the coming months and years. And I think I was also just curious about the, you know, the company itself. Um, and it just seems like such a kind of throwback in a way to these sort of like celebritydriven like, you know, direct to consumer companies that were, you know, bigger, I don't know, seven or eight years ago. But as I was sort of looking at, you know, the content around IM8 that exists right now, it did seem like a lot of it was sort of these sort of like manosphere influencers, not in the sense of having like crazy uh toxic viewpoints, but just sort of like fitnessoriented kind of presenting in a certain way. So I wonder if there is this sort of like audience that

that's really interested in this kind of like fitness product that maybe I'm just not aware of. you know, the practice of blitz scaling was really missing being leveraged to the teeth, you know, like let's like we saw so many companies rise to prominence in the early 2010s by throwing all their VC money at customer acquisition, but what they were really missing was that all that money was borrowed and sort of collateralized by their intellectual property or whatever is the collateral in this loan. God, I can only imagine what they're using to sort of set against this billion dollars. Well, to Anony's point, I think that we can look forward to our Instagram, you know, being completely taken over by

David Beckham's face. I'm guessing I will say that the co-founder of this company, Danny Young, he actually has a background in health and he had a company that went public in 2022 called Prrenetics, which I haven't really deeply looked into to see how it's doing. To me, what's really interesting is the timing of this. I mean, there is a lot of attention on health longevity. There's a lot of mixed messages going around with the maha movement as well, which is, you know, like what is health and what there's so many competing trends um and competing opinions around that and competing data. It just seems like such an incredibly noisy place to be right now. And yet here we are with another health drink company

popping in. So, we'll see how successful they are and how inundated we are all about to be with marketing. Can I just say one more thing on this? Like I'm no consumer products expert, but like just by looking at storeshelves and, you know, being a consumer myself, especially drinks, the drinks category, this stuff comes and goes like crazy, right? Like now it's Celsius. Yesterday it was Red Bull. all this stuff kind of like just appears. that has like a one or two-year run and that it's very hard for this stuff to really hang on with any kind of longevity and you know so the cynic in me actually now really is

curious like what is the collateral that General Catal has secured against this loan because like is this a play to walk away with something that they can you know you know be happy with if they're not going to get the full return on their billion dollar loan I don't know but it certainly makes me wonder the one hope that they might have talking about things coming and going is that if it becomes popular within specific communities. So like in the ultrarunning community for instance, which I have some insight into, Tailwinds is like the go-to. But that changes, right? And if like they basically like a product will lock it down for two years and it's like what everyone is using and then suddenly that shifts and if this company is able to do

that with some core groups and it becomes through word of mouth and otherwise the go-to product like I could see them carving out like a little bit of a piece but if they are just doing like blitz marketing I'm not so sure. Christian, I really like the way you kind of subtly snuck in a brag that you are the most in shape person on the Equity podcast. I have knowledge or married to one or I should say or married to one. I am not an ultr runner myself, but I am absolutely married to one. So, I get to see all these products come and go in our house.

Well, let's talk about like a different aspect of sort of health and medicine, which is drug discovery. and this startup coming from this open AI researcher Miles Wang and it is apparently I think we kind of broke the news that it's it's raising $200 million at a $2 billion valuation although the deal is not final yet. Yeah, this was a really good scoop from Marina on our team this week and I think you there's so much attention on people leaving these big companies these days and seeing what they do and so this is another example in a line of them like that. But I think there's also a lot of attention being focused on drug discovery, drug manufacturing, and it certainly is a thing that gets held up as like a prime example of, you know,

why AI is valuable at the highest level when people criticize it and say it's not worth anything. And so, you know, I think the more of these companies that are set up around this idea of trying to make these discoveries and find ways to actually prove out some use that goes beyond just SAS like for enterprise companies. Uh, you know, I'm interested to see them try and he has a long history of doing this stuff at OpenAI already. So, it seems like a competent enough person to go give it a shot. Yeah. and there like you mentioned sort of referred to this is seen as like an area where LLMs can absolutely be applied. Um and we've seen a number of startups try discovery as one that pops to mind. I'm interested in knowing

specifically what it's targeting because here's the one thing that's kind of important to note when using LLM for like drug discovery or any other kind of research. There's so many narrow slices that you make of that. Usually it's not like very broad research but pretty narrowly sliced. So I think of completely out of drug discovery but in discovery there is a startup called Aionics that I wrote about a few years ago that was using LLM to narrowly look at different electrolytes that could be used to help with batteries. So like that's very specific. And so you can see the opportunity here for dozens of different drug discovery startups using LLM. So I'm really curious to learn more

about, you know, what this company is really doing. Yeah, in a lot of ways it feels like such a classic startup funding announcement and that it's like sounds cool if they can pull it off. And I mean, I think there are reasons why, you know, I can see why they people would be making a pretty optimistic bet on this one because of the founders's background, but you know, there's so much more to learn in terms of like what they're actually focusing on and what they're actually building. I assume we'll probably be talking more about them in the future, but we are just about out of time. Thank you for listening and of course, Equity will be back next week. In the meantime, you can

follow us at EquityPod on X and Threads. Equity is hosted by Techrunch Senior Reporters and produced by Terresa Locan Solo with editing by Cal. Subscribe on YouTube or wherever you get your podcasts and find out what's next at techcrunch.com/events. Thanks so much for listening and we'll talk to you next time.