OpenAI–What Happened?

This week, the tech world was shocked by the sudden and unexplained firing of Sam Altman, the now-former CEO of OpenAI.

OpenAI has been the darling of the tech industry for the last year. Its current fundraising goals would put it on track to be one of the biggest unicorns in the US. But here are a few reasons why OpenAI probably can’t live up to its own hype. The events of this past weekend only underscore them.

My video on this topic is here.

Technical Debt, or at Least Technical Debt-for-Equity

OpenAI made a big splash by releasing ChatGPT3 in late 2022, and followed with updates this year. But OpenAI did not invent the core transformer technology behind GPT–that was originally from a core concept by Google. That’s why so many companies have been training up their own models lately. The barriers to entry in LLM development right now aren’t about technology, they are about resources. OpenAI trained ChatGPT3 and 4 using a lot of data, a lot of money and a lot of compute cycles.

The problem with this is that ChatGPT has a thin first mover advantage. Each iteration of a model takes tons of resources to produce. If OpenAI continues to draft on existing tech, and keeps building new models, it will be in a never-ending race that will require immense capital and resources, without significant economies of scale. That’s not sustainable.

Lack of Transparency and Weird Organization

The spat between the company’s board and its investors is very weird indeed. In most companies, the investors control the board. Boards and investors usually don’t have spats, particularly not public ones. But OpenAI is no ordinary company.

OpenAI’s parent entity is a non-profit called OpenAI, Inc., with a for-profit subsidiary called OpenAI Global, LLC. That is a bizarre structure for a tech startup. Non-profits don’t have shareholders, they have a board of directors. In contrast, the board of directors of a profit company is elected by its shareholders. The structure of control of an LLC is what we lawyers call “flexible”–which means opaque and idiosyncratic. But it is usually run more like a for-profit corporation.

To see how this odd structure happened, you need to read between the lines. In 2015, the original contributors for the non-profit pledged about $1 billion to the project, but many did not fulfill their pledges. So, in 2019, OpenAI transitioned from a non-profit to “capped for-profit” by creating a subsidiary LLC with shareholder profits capped at 100 times any investment. Just for reference, a “capped-for-profit” is not really a thing in corporate law, but with an LLC, anything goes. OpenAI then got an investment from Microsoft, for $1 billion, into the for-profit subsidiary, along with a deal for access to Microsoft’s cloud computing services. It then announced its intention to commercialize its products. But the for-profit entity is controlled by the non-profit.

This transition troubled initial contributors, and generated criticism. It’s kind of a joke in the tech business today that OpenAI as a company name is beyond ironic. It’s not open at all. In fact, open source advocates have generally viewed Altman and OpenAI as trying to set a narrative that avoids transparency in AI. They are pushing for regulation, to forestall demands for transparency. OpenAI has justified its move away from transparency due to its need to compete–but that’s circular logic.

Good Old-Fashioned Over-Valuation

OpenAI’s latest funding round is set to value the company at $80 billion. That’s bigger than the market cap on lots of existing public companies, including Boston Scientific and Mercedes Benz. Could it be worth that much?

It’s probably fair to say that OpenAI is the only company making significant money on large language models at the moment. (Though GitHub’s Co-Pilot is in the running, too, it’s currently based on ChatGPT.) Most companies that have released LLMs have not monetized them directly. In fact, LLMs are probably difficult to monetize at a rate that will be profitable over time–at least not based on the current data and resource-guzzing tech.

In this year of tech business malaise, AI has been the only bright spot. The conventional wisdom for 2023 is that no company can raise money, except AI startups, which are swimming in investment dollars. As usual, when private investors jump on a bandwagon, they tend to fund some terrible businesses. OpenAI is the superstar of startups today, but superstars have not fared well in recent years, tending to burn out or fade away.

Author: heatherjmeeker

Technology licensing lawyer, drummer

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