It's fair to say that I am sceptical of the AI revolution and its spearhead, OpenAI. The entire movement stinks of all hype and no trousers. But I never thought I would have to pose the "Is it a Ponzi scheme?" question. You see, OpenAI is going ahead with its transition to a for-profit structure. Not only does this make no sense, as, what profit? OpenAI is still and will almost certainly continue to operate at a massive loss. But OpenAI's questionable CEO, Sam Altman, is set to gain a massive 7% stake in OpenAI during this switch, equivalent to a $10 billion payday. I tried unpicking the convoluted logic behind this switch and the subsequent enrichment of Mr. Altman but discovered something completely unexpected.
First of all, let's define what a Ponzi scheme is. Google defines it as a form of fraud in which belief in the success of a non-existent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.
Straight away, there is a phrase in there that ensures OpenAI can't be a Ponzi scheme. After all, OpenAI is a fully operational enterprise with functional products that millions of people use, and as such, it doesn't meet Google's definition of a Ponzi scheme. However, Google's definition is based on public perception, not a legal definition. Instead, legal definitions describe a Ponzi scheme as an investment fraud that pays existing investors with funds collected from new investors. It doesn't matter if this involves a legitimate business or not.
With this in mind, there are four issues, which, when viewed together with the context of this for-profit shift and equity gift to Altman, at the very least make OpenAI look suspiciously similar to a Ponzi scheme.
Firstly, there is the issue of AI development. OpenAI's value and ability to raise funds were entirely based on the promise that its AIs will get substantially better over time. While products like o1 and Dall-E are remarkable, they aren't the economy-disrupting scale products that were promised. As such, investors are trying to get in on the ground floor by pouring money into OpenAI now so that they can benefit from its eventual meteoric rise.
But AI development is far from a sure thing. To keep AI improving at a steady rate, the amount of training data, infrastructure, and energy used behind the scenes needs to increase exponentially due to diminishing returns in the AI training process. As such, creating AIs significantly better than the ones we have today (in other words, the ones companies like OpenAI were valued upon) is simply unfeasible, as the cost to build them spirals into the trillions of dollars. What's more, we currently have no viable way to solve this problem. To read more about this, check out my article on it here.
As such, OpenAI's development is set to slow to a crawl; in fact, we have seen this in their recent models, which are only marginally better than their previous models and oftentimes just function as a prettier repackaging of that older model. This means that these investors have poured tens of billions of dollars into OpenAI on a false pretence.
Now, that wouldn't be a problem if OpenAI had a sustainable business model and had the ability to turn a profit, but they can't, and that is the second major issue.
OpenAI is reportedly set to post an annual loss of $5 billion at the end of the year. This is such a massive loss that they could actually be facing bankruptcy. What's more, even if you remove the reported costs of OpenAI's development program, they would still experience a loss. In other words, their current models are not profitable at all. No wonder it's been reported that OpenAI is considering a $2,000 subscription to access its advanced AI models. It desperately needs to massively expand its income just to support the products it already has. However, very, very few people would be willing to pay such huge prices. OpenAI is therefore unlikely to reach profitability with its current AI models, and because its next models are set to cost far more than these, they will potentially never reach profitability. To find out more about this, read my articles here and here.
When you look at the fundamentals of the technology and the business behind OpenAI, it makes literally zero sense to invest in it. Yes, it has a huge market share of the AI industry, but it is not a sustainable business; it can't reach profitability, and it physically can't produce the products its hype and original valuation were based on.
But that hasn't stopped investment from pouring in. Just after news broke of OpenAI's potential bankruptcy, OpenAI announced it was looking to raise another $6.5 billion from investors at a valuation of $150 billion and secure a $5 billion credit line from banks. A valuation of $150 billion is insane, especially as just a few months earlier, they were valued at around $80 billion, and even then, many were calling it overvalued. However, it seems OpenAI isn't having a hard time securing these funds, as venture capital firms, big tech companies, and investment banks appear to be falling over themselves to give OpenAI their cash.
But, why?
Well, this brings me onto the third issue: Sam Altman's hyperbolic statements on AI. He has claimed some wild shit about AI. He has stated the technology could mean "lights out" for humanity and has signed an open statement declaring that AI should be considered a nuclear-level threat. He has claimed that AI could shock the global economy to the point of destruction. He has even started talking about what the company will do when they create superintelligent AI. He reportedly has an absurd plan to "take $7 trillion" and "build 36 semiconductor plants and additional data centers" to fulfil OpenAI's vision.
The vast majority of independent AI experts (i.e., those not tied to an AI startup or need for media coverage) agree that these statements are all total bollocks or a fantasy that Altman is profligating. For example, we are likely at least a thousand or so years away from making a true super-intelligent AI.
So, why does Altman make these outrageous, unfounded, and hyperbolic claims? Simple. It's a dog whistle to institutional investors. Over the past 40 years, technology has created multiple near-monopolies, such as Microsoft, Apple, Google, Amazon, and Facebook. With each technological revolution, a handful of companies take over 99% of the industry that stems from that revolution, giving them wild amounts of power. Venture capitalists, investment banks, and the like all adore this power and deeply lament missing out on securing more of it in the past. Sam Altman's claims are effectively screaming at these institutional investors that he can give them this monopolistic power, not only over the AI revolution but over our entire economy and potentially the entirety of humanity. It's not a coincidence that OpenAI's largest backers are the big tech near-monopolies of past revolutions that desperately want to keep their position. But this means that even with OpenAI's dodgy business and technology fundamentals, these investment firms are getting a major case of FOMO and power lust, and so are diving head first into OpenAI.
The fourth issue is this transition to for-profit and Altman gaining equity in OpenAI. OpenAI has said the reason for the switch is because it will enable them to "increase our ability to raise capital." However, that doesn't fly. You see, they have already been able to raise literally tens of billions of dollars with their current capped-profit model. So, that isn't a hurdle for them. What's more, they aren't making any profit, so it's not like this is to get rid of the capped profit limit either. Instead, this looks like it is simply a move to give Sam Altman a massive stake in the company. When you consider he was briefly ousted as CEO of OpenAI for corporate manipulation, lost his old job at VC firm Y Combinator for prioritising personal projects ahead of the company's, and numerous board members of OpenAI have left OpenAI explicitly because of his questionable ethics and behaviour, taking such a dramatic ownership of the company in this way would be consistent with his track record.
Okay, so how is all of this a Ponzi scheme?
Well, as we have established, OpenAI's core business isn't and won't be profitable, and their technology can't reach the economy-destroying scales of market share Altman promised thanks to hard limitations to AI training. As a result, OpenAI's current value isn't based on its position now or in the future. Instead, it was driven by Sam Altman's massively overexaggerated claims about his AI products and the FOMO of these institutional investment groups desperate to catch the next big monopoly. But this creates a very Ponzi scheme-like dynamic.
Take Microsoft. It pumped over $13 billion into OpenAI by 2023 at an eventual valuation of $29 billion, giving it a roughly 49% stake in the company. Now, just a year later, this same company is being valued over five times higher at $150 billion, despite the fact its current models aren't much better than they were in 2023, and it has only doubled its annual revenue from 2023 yet still remains wildly unprofitable. But if OpenAI achieves this valuation through new investment, Microsoft's stake will be worth $73.5 billion.
Now, the only reason the company is being valued so highly is because more institutions are pouring in more investment into OpenAI. They see a hype train and want a one-way ticket. They want the same return as Microsoft and blatantly ignore the rotten fundamentals at the core of OpenAI.
This mirrors a Ponzi scheme in the way that investors like Microsoft can only get their money back from their OpenAI investment by others investing more into OpenAI (despite the fact the company shouldn't be invested in this much), as this is the only way to both keep OpenAI afloat, given that someone has to pay for the losses, and grow the valuation of the business. One investor is paying off another, just like in a Ponzi scheme.
This is only possible thanks to Sam Altman's unfounded over-exaggeration. In a way, he effectively kicked off and grew the OpenAI hype train, constantly giving it fuel in the form of false predictions and dog whistle worries. Until recently, he had no real way to benefit from these Ponzi scheme-like dynamics. But this shift to for-profit and his gaining a 7% ownership of this new for-profit structure, he can.
Also, don't forget that companies like Microsoft and billionaires like Altman don't have to sell their ownership to profit from it, as they can use them as collateral for loans. In fact, some wealthy individuals use these loans as their income in a tax avoidance scheme known as buy, borrow, die.
So, is OpenAI a Ponzi scheme?
I'm not a financial expert, so I can't say for sure. But what I can say is that the investment cycle around OpenAI is highly reminiscent of a Ponzi scheme, as it doesn't reflect the underlying technology or business fundamentals of the company at all. What's more, it appears not only is Sam Altman stoking this cycle but also positioning himself to be massively financially enriched by it.
So, to me, OpenAI is at least Ponzi scheme-adjacent.
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(Originally published on PlanetEarthAndBeyond.co)
Sources: Windows Central, Reuters, The Economist, Investopedia, Y Combinator, Bloomberg, Fortune, Fortune, Will Lockett, Will Lockett, Will Lockett, Will Lockett, CNBC, The Information