From Non-Profit to For-Profit: How OpenAI Plans to Make Money

In 2019, the non-profit AI research startup OpenAI turned a page that would alter its bedrock. Unusual though it may be for a non-profit organisation to make millions of dollars, OpenAI announced the OpenAI LP as an entirely separate entity, calling it a ‘capped-profit’ corporation. While the company would continue to research and develop new technologies, it also wanted to make more money in the process. 

Profitable, with a clause

The details of the deal were this – investors of the startup could now earn up to 100 times their investment and not more than that value. The remaining money made would go right back into their nonprofit work done by another entity called OpenAI Nonprofit. OpenAI counts a bunch of big names among its VC firms like Andreessen Horowitz, Sequoia, Tiger Global and Founders Fund, all of which have the option to exit the agreement whenever they want. 

Coincidentally, the company’s decision to turn into a profit-making entity also was right before the release of its text-to-image generator DALL.E. The tool is the precursor to DALL.E 2, a far more refined version, which was released last year prompting a wave of generative AI research and startups. 

The change was a departure from OpenAI’s ethos. Four years prior to this, OpenAI’s initial charter had stated that the startup’s ‘primary fiduciary duty is to humanity’ and that its goal was to ‘build value for everyone rather than shareholders’. Taking the middle road helped OpenAI kill two birds with one stone – the company still retained credibility as a pure research company while being able to attract investors. 

OpenAI’s shift to a for-profit model was also easily explained by the high cost that AI research needed to run compute for training and testing models. 

How does OpenAI make money?

As with any company that takes this route, OpenAI is now under pressure to generate revenue for its investors instead of sticking to its original, noble mission statement. So, how does OpenAI plan to make money? 

API

In September 2020, the startup revealed the projected pricing plans for its API for users to be able to mostly access the company’s flagship AI tool GPT3, which had been making headlines since its launch. LLMs like GPT3 require hundreds of expensive GPUs and the money OpenAI was making had helped the company make progress in running the models more efficiently, the company later stated. OpenAI also makes a lot of money from enterprises that mostly use fine-tuned GPT3 models as they achieve high levels of performance at a fraction of the cost. 

Investors and Microsoft deal

But the real pot of gold for the company has turned out to be its wildly popular chatbot, ChatGPT. On January 5, WSJ reported that OpenAI was in talks with VC firms Thrive Capital and Founders Fund to sell its existing shares in a tender offer. The tender could total up to at least USD 300 million in OpenAI share sales. The ongoing talks led to OpenAI being valued at around USD 29 billion, making it one of the most valuable US startups despite the little money it was making. 

Meanwhile, Microsoft, a partner with OpenAI confirmed a multi-year investment on January 23 while investing an additional USD 10 billion into the startup. Microsoft was a natural buyer for OpenAI considering the startup already used Azure for training its models. 

Under the agreement terms, Microsoft was entitled to 75% of OpenAI’s profits until it earns back its initial investment. Once it reached that limit, Microsoft would have a 49% stake in the startup with other investors taking the other 49% and the nonprofit parent ending up with 2%. When the deal was inked, sources said that OpenAI expects USD 200 million in revenue this year and USD 1 billion by 2024.

Subscription fee

ChatGPT also brought about the paid subscription option to OpenAI. Last week, the company announced a USD 20-a-month price for its subscribers who would be upgraded from the limited, free service. The plan would initially be rolled out in the US and then slowly expanded to other countries even as OpenAI considers lower-cost subscription options. 

A UBS report pegged ChatGPT users at an estimated 100 million active monthly users just two months after its launch. The research stated that the chatbot was the ‘fastest-growing consumer application in history’ making it even faster than TikTok and Instagram at user acquisition. And it’s not just us and our friends on ChatGPT, several companies, including digital publisher Buzzfeed, use the chatbot to generate content within seconds. 

ChatGPT is hailed as a competitor to Google Search, but the revenue models of OpenAI and Google differ as much. Google’s main money-maker is online advertising, which makes up more than 80% of its USD 147 billion according to the tech giant’s annual report. There are many loose ends that must be tied up in the future of this story – ChatGPT might revive Bing as announced by Microsoft. But while Microsoft or OpenAI has no connection with online search and therefore advertising revenue, it has an upper hand over Google owing to its legacy of partnerships with several brands to rest on.