Jan 10, 2023 - Economy

How a Silicon Valley nonprofit became worth billions

Illustration of a roll of money falling into a cupped hand

Illustration: Natalie Peeples/Axios

There are various different ways to make hundreds of millions of dollars, but historically "starting a nonprofit" has not been one of them. Silicon Valley, however, has managed to find a way, at ChatGPT creator OpenAI.

Why it matters: OpenAI pivoted from nonprofit to for-profit status in 2019, a mere four years after it was founded with $1 billion of donations from Elon Musk and others. It's now reportedly in talks to raise $10 billion from Microsoft, much of which is likely to go straight into shareholders' pockets.

The big picture: As Karen Hao explained in an excellent article for MIT Technology Review in 2020, OpenAI's charter, drafted in 2018, is the core of everything that the company stands for.

  • Under the terms of the charter, which was written when the move to for-profit status was already being planned, OpenAI is "committed to providing public goods," while its "primary fiduciary duty is to humanity."

Between the lines: The stated reason for moving to for-profit status was that the cost of AI research was so incredibly high that only a for-profit could raise the requisite amount of cash.

  • Axios' Dan Primack and Ina Fried reported on Friday that Microsoft — a company very much in the business of selling private goods so that its shareholders make a lot of money — is a natural buyer for OpenAI.
  • A slew of big-name for-profit venture capital firms, including Founders Fund, Andreessen Horowitz, Sequoia, and Tiger Global, are investing in OpenAI. All of them, by their nature, are going to want some kind of exit. While that's not easy under the charter, the investments wouldn't have happened if it were impossible.

Be smart: The company is structured so that the maximum return to early investors is 100x — if you put in $10 million, you can't take out more than $1 billion. All returns above that go to a nonprofit arm.

  • That's a way of OpenAI trying to have its cake and eat it — to generate the kind of returns that its VC backers need, while also staking a quasi-plausible claim to the moral high ground that caused researchers to flock there in the first place.

By the numbers: OpenAI says that "if we are successful, we expect to generate orders of magnitude more value than we’d owe to people who invest in or work at OpenAI." In other words, they expect to be worth trillions of dollars.

  • The catch: It's hard to see how OpenAI can be worth even hundreds of billions of dollars if it's genuinely committed to providing public goods, per its charter.
  • Public goods are things like GPS, or TCP/IP, that are given to all of humanity sans any licensing fee. Both of those technologies have helped to power many billions of dollars in value, but neither of them has any financial value itself.

The bottom line: OpenAI is a very valuable for-profit company, expertly using hype cycles to maximize the value of its shares.

  • It has lost the moral high ground, however — and everybody who funded it while it was a nonprofit has the right to feel a bit aggrieved that they were unwittingly providing seed capital to make Sam Altman and his colleagues even richer than they already were.
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