“Last fall, the nonprofit that controls OpenAI tried to fire the company’s high-profile leader, Sam Altman. It failed. Ever since then, Mr. Altman has been trying to wrest control of the company away from the nonprofit.”
In 2015, an ambitious project was launched that would fundamentally change the direction of artificial intelligence: OpenAI. At a time when tech giants such as Google, Facebook and Amazon dominated AI research, many experts feared an increasing monopolization of this groundbreaking technology. Elon Musk, prominent visionary and founder of numerous start-ups (SpaceX, Tesla, Neuralink, xAI, ...), repeatedly expressed his concerns about the risks of uncontrolled AI development. Together with like-minded people such as Sam Altman, then president of the startup accelerator Y Combinator, and researchers Ilya Sutskever, Greg Brockman and Wojciech Zaremba, he launched OpenAI.
OpenAI was initially founded as a non-profit organization. The core idea was to develop AI in the interest of all of humanity and to ensure that the technology would not be controlled by a few powerful companies or used for questionable purposes. The non-profit legal form was a clear statement: the primary focus was not on profit, but on ethics, responsibility, and ensuring equitable access to AI technologies in the long term. This decision reflected a deep understanding that AI is a transformative force with the potential to fundamentally change our society.
But how do you finance a non-profit organization at the center of a technological race? How can a project designed to serve humanity generate enough capital to advance the necessary research? This is where the mechanisms of start-up financing come into play. Although OpenAI was initially funded by generous donations – a billion US dollars from individuals such as Elon Musk, Sam Altman and other supporters – it quickly became clear that long-term innovation, especially in the field of AI, requires significant resources.
Start-ups that develop groundbreaking technologies usually depend on venture capital (VC). Venture capital (VC) is a special form of financing that focuses on young, innovative and high-growth companies. These companies, often referred to as start-ups, are in the early stages of development but have the potential to revolutionize an industry. Venture capital financing is particularly common in the technology, biotechnology and other innovation-driven industries.
At its core, venture capital is based on a simple but risky idea: investors provide capital to fund the development of a start-up in return for shares in the company. These shares promise a high return on investment (ROI) – often a multiple of the original investment – if the company is successful. However, the risk is high: many start-ups fail and do not provide investors with a return. It is estimated that 75% of all VC investments do not yield a profit for investors.
The VC process usually involves several clearly defined phases:
1. Seed phase (start-up capital): this phase is about financing a business idea or a prototype. The capital is often used for product development or initial market tests. Investors are betting on the potential of the founders and the vision of the product.
2. Series A (growth financing): once the start-up has developed a marketable product and acquired its first customers, further capital flows into scaling the company. Institutional investors often come into play at this stage.
3. Series B, C and follow-on financing: These later financing rounds serve to further expand the business, open up new markets or develop additional products. The further the start-up grows, the higher the capital requirements and the investment sums.
4. Exit strategies: The long-term ROI for VC investors comes from the so-called “exits”. A successful exit can be an initial public offering (IPO) or the sale of the start-up to a larger company. On these occasions, investors sell their shares at a high profit margin.
VC investors, also known as venture capitalists, are usually specialized funds, investment companies or wealthy private individuals, so-called business angels. They not only contribute capital, but also valuable experience, networks and strategic support. For start-ups, VC means not only financial resources, but also access to mentors and resources that can accelerate growth.
For OpenAI, this form of financing was not ideal at first, as it could jeopardize its non-profit character. But how can you keep up in the race to develop AI when the competition has almost unlimited financial resources?
“As it stands, OpenAI is a for-profit operation with hundreds of workers, millions of customers and billions of dollars in revenue that is overseen — at least in theory — by a high-minded nonprofit with just two employees.
Mr. Altman wants to remove the nonprofit’s control and let the for-profit business run itself. Without that new structure, OpenAI could struggle to raise the enormous amounts of money needed to build its technologies and keep pace with tech giants like Google, Meta and Amazon.”
This is where Sam Altman's entrepreneurial skills came into play. Altman was no stranger to the start-up world. As the former president of Y Combinator, one of the world's most prestigious start-up incubators, he had advised and supported numerous successful companies. He understood the dynamics of venture capital, scaling, and technological innovation like no other. For Altman, it was clear that OpenAI needed a structure that would enable it to generate capital without jeopardizing its original ethical goals.
The turning point came in 2019, when OpenAI decided to create a hybrid organizational structure. The nonprofit parent company remained in place, but a new subsidiary was established: OpenAI LP, a limited liability company. This structure made it possible to bring investors on board who could expect a return on their invested capital – albeit with a clear cap. The capped profit mechanism ensured that excessive profits were avoided and a large proportion of potential revenues went to the non-profit objectives. OpenAI had thus found an innovative way to reap the benefits of venture capital without submitting to the classic pursuit of profit.
“We’ve experienced firsthand that the most dramatic AI systems use the most computational power in addition to algorithmic innovations, and decided to scale much faster than we’d planned when starting OpenAI. We’ll need to invest billions of dollars in upcoming years into large-scale cloud compute, attracting and retaining talented people, and building AI supercomputers. We want to increase our ability to raise capital while still serving our mission, and no pre-existing legal structure we know of strikes the right balance. Our solution is to create OpenAI LP as a hybrid of a for-profit and nonprofit—which we are calling a “capped-profit” company.
The fundamental idea of OpenAI LP is that investors and employees can get a capped return if we succeed at our mission, which allows us to raise investment capital and attract employees with startup-like equity. But any returns beyond that amount—and 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 LP—are owned by the original OpenAI Nonprofit entity.”
An important financial milestone was the partnership with Microsoft. The tech giant invested $1 billion in OpenAI LP in 2019. This investment was not only a vote of confidence in OpenAI's vision, but also gave the company access to Microsoft's cloud platform Azure – a critical infrastructure for training AI models that require enormous computing power.
“Microsoft is investing $1 billion in OpenAI to support us building artificial general intelligence (AGI) with widely distributed economic benefits. We’re partnering to develop a hardware and software platform within Microsoft Azure which will scale to AGI”
For Microsoft, the partnership was a strategic opportunity to gain access to advanced AI models that could revolutionize its own products and services (e.g. now in GPT-4 in Bing or in applications in 365 Copilot). This change in the funding structure was crucial for OpenAI's ability to remain competitive and achieve its ambitious research goals. While many start-ups in the AI world are geared towards profit from the outset, OpenAI remained true to its mission: to develop artificial intelligence that serves humanity as a whole and not just the interests of a few companies.
The question of how OpenAI makes money is easier to answer today than it was when it was founded. By making AI technologies commercially available, OpenAI has tapped into new sources of revenue. For example, OpenAI offers paid access to its API services, which enable companies and developers to integrate language models such as GPT-4 into their own applications. ChatGPT Plus, a subscription service for end users, also generates regular income – now in different levels (since o1 Pro). In addition, license agreements and partnerships with companies such as Microsoft benefit from OpenAI's technological advances.
Overall, OpenAI has so far managed the balancing act between ethical responsibility and economic necessity well. The organization has found a way to generate capital to keep up in the technological race while remaining true to its vision of developing AI for the benefit of all humanity, even though the for-profit arm is certainly still a thorn in the side of many non-profit purists. However, Sam Altman and the team at OpenAI have so far proven that it is possible to foster innovation while respecting ethical guidelines – a rare balance in the world of technology.
Coming Soon: Part 2 of OpenAI’s Ethical Balancing Act
Ever wondered what really keeps the OpenAI machine running—and who might pull the plug on it all? In Part 2, we’ll unravel how AGI could shake the balance of power between Microsoft and OpenAI, potentially driving them apart just when the stakes are highest. In the second part, we will not only look at the current financial situation, but also at the cooperation with Microsoft, which plays a significant role in the financing. So, stay tuned!
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