After initially investing $1 billion in OpenAI back in 2019 and agreeing to an exclusive deal to provide cloud computing power, Microsoft (MSFT) has reportedly paused its funding to the startup. Microsoft CEO Satya Nadella became worried when OpenAI's board briefly ousted CEO Sam Altman last year, and with mounting concerns about OpenAI's spending and Microsoft's over-reliance on the company for its AI initiatives, the tech giant is now exploring alternate sources of AI power. Microsoft has also since hired most of the staff from OpenAI competitor Inflection.

Santosh Rao, Manhattan Venture Partners head of research, joins Morning Brief to discuss the relationship between OpenAI and Microsoft and break down the state of private AI companies.

"I think you're going to see a lot of this back and forth going on because this whole space is really developing... But I don't think in the end, it's a too huge market, too important a technology to get it into their ecosystem. So there will be compromises. There will be some arrangement. But at the end of the day, you're going to see this because it's a high-stakes game going on in AI, so these kinds of battles do happen — especially in the initial stages that we are in," Rao tells Yahoo Finance.

As many AI companies are burning through cash to build and support their operations, Rao believes that it has become a "big concern" for investors looking for significant returns. "Nobody's making money right now except for Nvidia (NVDA). So I think that that's a huge issue in this AI space down the road," he explains. However, he believes that while a "massive investment" is necessary, it will eventually pay off as AI models grow.

While OpenAI has become a household name, Rao notes that the IPO market is "on hold" for it and many other private AI names. However, he believes that it is "at the cusp of coming out," and that 2025 will be a "sweet spot" for the IPO market. He points to limiting factors like high volatility, price discovery, and the election keeping many private companies on the sidelines.

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This post was written by Melanie Riehl