Will the "necked" non-profit OpenAI finally break free from its constraints and go public?

Recently, many media reports have claimed that the leader in generative AI field, OpenAI, will eventually go public and trade on the US stock market, emphasizing that only an IPO can meet OpenAI's continuously expanding funding needs for training its incredibly powerful general artificial intelligence. However, some analysts point out that if OpenAI considers conducting an Initial Public Offering (IPO) in the future in the United States, the company will face many challenges, with the most significant one being rewriting its corporate charter. "The core issue is that OpenAI's corporate governance fundamentally belongs to a non-profit organization structure, meaning it was not established for profit, but rather as a project to control the development and path of artificial intelligence technology through leadership to ultimately 'benefit humanity'," analyst Joe Albano from Seeking Alpha said via email. "This is completely incompatible with the principles of going public," he added. "Who would invest in a tech company that is not profit-driven?" OpenAI wants to go public for funding, first needs to break free from the "non-profit shackles" It is understood that OpenAI's corporate structure is exceptionally complex, but from a governance perspective, it remains a company controlled by a non-profit organization. Initially, OpenAI was established in 2015 as a non-profit organization with the goal of advancing safe and beneficial artificial intelligence (AI) development. Although OpenAI created a "capped-profit" subsidiary company, OpenAI LP, in 2019, with the non-profit organization OpenAI Nonprofit controlling its profit-making subsidiary OpenAI LP to raise funds for AI research, its core governance structure is still fully controlled by OpenAI Nonprofit. The current "hybrid structure" of OpenAI is characterized by OpenAI Nonprofit still controlling overall operations and mission, while OpenAI LP allows for external investments to fund the high costs of AI research and development - OpenAI has spent over $10 billion in less than two years on research and development expenditures. At the same time, investor profit returns are limited to a certain range, with any excess returns being returned to OpenAI Nonprofit to fulfill its beneficial mission for humanity. It is reported that the latest round of funding by OpenAI aims to reach $6.5 billion, pushing the valuation of this startup to a staggering $150 billion. This would make this leader in the generative AI field, led by Sam Altman, the most valuable AI startup globally. Although Altman has not announced any plans related to an OpenAI IPO, the recent hiring of a CFO, as well as a series of potential acquisitions and high valuations, suggest that the company may be moving in that direction. Reports quoting insiders reveal that OpenAI is also discussing with its lawyers how to transform its non-profit structure into a for-profit benefit corporation. Altman is pushing for OpenAI to cancel the profit caps for investors, but canceling the "profit caps" requires formal approval from the non-profit OpenAI committee, which includes Altman as CEO, entrepreneur Bret Taylor, and seven other members. Seeking Alpha analyst Uttam Dey believes that OpenAI will eventually go public, but not within the next 12 months. "Considering its complex organizational structure, OpenAI will continue to operate as a non-profit organization, so an IPO might take more time," Uttam Dey said. "The current structure of OpenAI sets profit caps for its investors, and if they need to realize liquid profits, they will face significant challenges." "Nevertheless, OpenAI seems determined to address this issue, and in my opinion, it is moving forward with determination," he added. "The recent hiring of Sarah Friar as CFO strongly indicates that OpenAI is preparing for a possible IPO and a complete transformation into a for-profit structure." Friar himself has extensive experience in the capital markets. This 51-year-old seasoned strategist joined the future payment giant Block in 2012 after working at Goldman Sachs Group, Inc., helping lead the once-obscure payment company Block to its IPO in 2015 and became CEO of Nextdoor in 2018, which went public in 2021. Pros and cons of going public If OpenAI successfully goes public in the future, early investors such as Microsoft Corporation (MSFT.US) will benefit the most. OpenAI will also gain broader liquidity profits and capital sources. However, becoming a public company also comes with costs, including increased regulatory scrutiny, increased operating expenses from scale expansion, and increased shareholder transparency. "Considering that the company might burn through $5-7 billion annually, going public might actually help the company become more disciplined," added analyst Dey. Seeking Alpha analyst Gary Alexander also sees important choices for OpenAI to increase profitability, but this may take time. Alexander said, "In addition to increasing subscription products and new revenue models, I also believe that going public will help increase further corporate compliance, which will enable OpenAI to achieve many large-scale transactions at the enterprise level." "However, the biggest advantage of this IPO seems to be creating liquidity for founders and early investors like Microsoft Corporation." He even suggested not to immediately buy OpenA after the IPO.My stocks, because their valuation and demand may be exaggerated. Analyst Dey also said that the stock may be very volatile in the early stages of its listing.Currently, the absolute leader in the field of AI applications, the big data analysis giant Palantir (PLTR.US), provided a good comparison in its first public offering in 2020. Alexander pointed out, "After experiencing an initial sharp rise in stock price, Palantir quickly began to fall back, and it took the company several years to rebound with its strong fundamentals, not just market frenzy." He added that a public OpenAI could boost the valuations of some large competitors, like Microsoft Corporation and Alphabet Inc. Class C, creating a new public competition market for artificial intelligence. Seeking Alpha analyst Albano stated, "If OpenAI successfully goes public, it means the company is 'changing course, realizing the need for more funding to drive research and development, so it can push forward Sam Altman's AI chip mass production dream, or the core management of OpenAI realizes that it cannot play a strong role in the global AI competition unless it aims for profit.'"