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NVIDIA and OpenAI’s capped returns

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Open AI’s capped returns


OpenAI announced yesterday that they are going to be offering a “capped return” security for investors as part of the for-profit/non-profit split the organization is creating:
As mentioned above, economic returns for investors and employees are capped (with the cap negotiated in advance on a per-limited partner basis). Any excess returns go to OpenAI Nonprofit. Our goal is to ensure that most of the value (monetary or otherwise) we create if successful benefits everyone, so we think this is an important first step. Returns for our first round of investors are capped at 100x their investment (commensurate with the risks in front of us), and we expect this multiple to be lower for future rounds as we make further progress.
I candidly don’t understand this structure at all. For venture capitalists — and particularly early-stage investors — returns are driven by one, maybe two, and extremely rarely three startups in a portfolio (that would be Benchmark’s 2011 fund, which includes Uber, Snap, and WeWork). That one outlier investment may drive a majority of all fund returns. If OpenAI were to be that investment, how you could you possibly relinquish the remaining upside? Maybe you could prospectively sort of accept this, but how would you explain to LPs that “ah, yes, seven years ago we decided to give up that next 150x” or whatever.
OpenAI LP (the for-profit entity) is trying to target more mission-oriented investors, who presumably value incentive alignment but not (huge) profits. That’s fine, but the idea of capping a return as a mechanism to capture run-away value creation seems really off to me and should be discouraged.
My colleague Devin Coldewey also had a negative take, but sort of in the opposite direction — that OpenAI “may not be quite so open going forward” and is going to focus more on profits than science. That’s a fair criticism as well, although I think the profit motive will get us to AGI faster.
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With Mellanox deal, NVIDIA buys a chance to salvage its growth


NVIDIA and OpenAI’s capped returns
Photo by David Becker/Getty Images
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