10 days ago, it was announced that OpenAi raised $6.6 billion in funding, valuing the company at $157 billion. It is the largest venture capital round ever.
One of the most critical bits of innovation is how it is financed, the fragile loop through which early-stage startups are funded, and how the value they create gets redistributed to the wider world. Along the way, venture capitalists and business angels see a return on the risk they are taking, usually when the companies they funded get acquired or go “public”. When a company becomes public, in theory, everyone can benefit from the upside, redistributing some of the value created to everyone through various instruments such as pensions, retirement savings… etc.
As an example, when Google IPO’ed, it raised $1.7 billion and had a market capitalization of $23 billion. Since then (2004), Google has reached a market cap of $2 trillion. This means about $1.97 trillion of value was created while it was public. Today, among its largest shareholders are Vanguard , BlackRock , and Fidelity Investments … which are companies offering various investment products to “regular” folks who (can) save. In other words, you and I can benefit from some of the value created by (our use of) Google.
When OpenAI raises 5x as much privately and a valuation that’s 6x bigger, it means that a much more significant chunk of the value created by OpenAI will remain “private” in the hands of late-stage venture capitalists and their limited partners, who are often big companies, wealthy family offices or even universities… Additionally, these private intermediaries usually take a significant chunk of the upside through their carried interest, leaving a lot less value to be (re)distributed to the broader public.
I don’t blame the OpenAI management for deciding to remain private longer because it is much simpler for them than preparing the arduous process of IPO. Public markets tend to require short-term performance over long-term investments, which sometimes makes it hard to keep investing for growth. Still, if we continue to see more and more of the value creation happen privately in technology companies, we will keep seeing increasing wealth inequalities. Additionally, it means that the loop through which early-stage investors are “rewarded” gets even longer, reducing their performance and leading to an inevitable decrease in that precious early-stage funding. (see CRV will return its capital to investors H/T Scott Galloway )
The “instant” liquidity of crypto markets is another extreme, with many pitfalls, but it also explains why lots of individuals investors favor these markets, simply because they are left out of the “big multiples” in traditional markets.
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