OpenAI: Profit limit will no longer adjust with capital increase

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Artificial intelligence sits at a strange intersection between financial and human progress. Investors are expecting big profits, as reflected by a 27% increase in the shares of AI chip maker Nvidia following a revenue update. Lawmakers are concerned about job losses and misinformation.

Starting the AI Open AI it has a cap on investor returns that signals its lofty desire to balance those goals. If sales explode, the cap may not last long.

The San Francisco start-up was founded in 2015 as a non-profit research organization. His goal was to benefit humanity through AI without financial gain. But the cost of experimentation is high. Employee salaries and cloud computing bills run into the tens of millions of dollars a year. Elon Musk, an early investor with deep pockets, stepped down from the board in 2018. Shortly thereafter OpenAI created OpenAI LP, a “limited profit” disciplined arm of the nonprofit.

The change in structure has allowed OpenAI to attract investors rather than donors. But there’s a problem. Early investors returns are limited to 100 times their money. Later investors, such as Microsoft, have reportedly agreed to a 20x limit.

The odds of any beginning investor getting a 100 or even 20x return on their money is normally slim. Unusually, venture capital firm Sequoia Capital earned an estimated 50x return on its investment in WhatsApp when Facebook bought the messaging app. For most VCs, a 10x comeback is considered a smash hit.

Investors in OpenAI don’t have to worry about profit caps for now. It is expected to generate $200 million in revenue and no net income this year. At a valuation of $29 billion, that would mean OpenAI is valued at a whopping 145 times its projected sales. Compare that to Google. Eight years after its founding, the research business was already a profitable public company.

ChatGPT, the popular AI-based chatbot from OpenAI, has generated mass interest in AI tools. Last week it released its first app. It has a partnership with Microsoft and sells AI services to private and corporate customers. This is the beginning of a new market that could be dominated by a small number of companies. The profit gains are potentially large.

To compete, however, OpenAI will need funding. Look at Google, where free cash flow at parent company Alphabet surpassed $60 billion in just one year. Future OpenAI investors may balk at the idea of ​​a profit cap. The start-up has already changed its structure. He can do it again.