The Journal. - Sam Altman's Opaque Investment Empire

Episode Date: June 20, 2024

OpenAI CEO Sam Altman has a day job and a side gig. Only one of them makes him rich. WSJ's Berber Jin explains how Altman makes most of his wealth through investing in tech startups and how some of those startups' business relationships with OpenAI raise questions about conflicts of interest. Further Reading: - The Opaque Investment Empire Making OpenAI’s Sam Altman Rich  Further Listening:  - Artificial: The OpenAI Story  - Tesla's Multibillion-Dollar Pay Package for Elon Musk  Learn more about your ad choices. Visit megaphone.fm/adchoices

Founders of big tech companies usually make a lot of money. People like Bill Gates, Jeff Bezos, Mark Zuckerberg made billions of dollars from the businesses they helped start. Elon Musk was recently granted a pay package at Tesla worth around $48 billion. But Sam Altman, the CEO and co-founder of OpenAI, one of the hottest startups in the world? $65,000. That doesn't sound like a lot for a man running a company like this. Yes, definitely not a lot of money for someone who runs the second most valuable U.S. startup. Huh. Is that unusual? It's extremely unusual.

Most startup founders are the largest owners of the equity in their companies, and a lot of their net worth is tied up to the companies they run. That's our colleague Berber Jin. He says that even though Altman is paid a low salary, it doesn't mean he isn't rich. In fact, he's extremely wealthy, but not because of open AI, at least not directly.

Altman is an investor. He's invested in more than 400 tech startups and controls at least $2.8 billion of those companies' equity, according to company filings in Wall Street Journal reporting. And some of those companies have close business ties with OpenAI. As OpenAI grows

and its ambitions grow and companies want to work with OpenAI, a lot of his portfolio companies and his investments are working directly with the company that he runs. And so that raises all sorts of pesky conflicts of interest questions. Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudson. It's Thursday, June 20th. It's Thursday, June 20th. Coming up on the show, where Sam Altman makes his money,

and why it could be a problem for OpenAI. Attention all soccer fans. From Orlando to Los Angeles, We'll see you next time. You'll love it so much, you'll want to extend your stay beyond the matches. Get the ball rolling on your soccer getaway. Head to visittheusa.com. Typically, company founders receive a lot of their compensation in stock. And it's a very intuitive setup. As an investor, you want a founder who is motivated financially to make their company succeed. And one reason why entrepreneurs in Silicon Valley in particular work their butts off with their companies is because they want to become billionaires when their company's IPO. So the fact that Sam Altman has no equity

and only a relatively humble salary at OpenAI has raised a lot of questions. Here he is testifying in front of Congress last year. You make a lot of money, do you? No, I'm paid enough for health insurance. I have no equity in OpenAI. Really? That's interesting. You need a lawyer.

I need a what? You need a lawyer or an agent. I'm doing this because I love it. So why did Altman originally agree to such a low salary and to not take any equity when OpenAI was founded? This is a question, I think, that continues to baffle even people inside Silicon Valley because he knew at the time that he was building a company that could

be transformational and make him unimaginably rich. What he said, and he said this many times and I think he takes it very seriously, is that he had this humanistic mission of developing AI for the benefit of humanity and not corporate shareholders, he made this decision to try and essentially live those values in practice by not taking a stake. In other words, he's saying he wants to be motivated to build up an AI in a way that's good for humanity and not in a way that is going to make him rich.

Exactly. Part of the reason Altman was able to turn down a big pay package is because he already had a lot of money. We don't know his exact net worth, and it's difficult to calculate it because so much of his holdings are tied up in private startups. But he's much more wealthy than the average American. He owns vacation homes in Napa Valley,

which is prime wine tasting estate in California. And he owns a big mansion in Hawaii. He loves sports cars. He owns a line of luxury sports cars from luxury manufacturers. cars from luxury manufacturers. And so he definitely has the financial liberty to live large. And he did sign on to the Giving Pledge in May, which is basically a pledge from self-described billionaires to pledge to give away the majority of his wealth. So by that definition, he might be saying in a very low-key way that he's a billionaire.

Altman's wealth comes from outside of OpenAI, from other companies he's invested in. And he invests a lot, especially in young, unproven startups. Even in Silicon Valley, no one even comes close to the amount of investments that Altman has made. And it's just extremely unusual for so much of a CEO's wealth to not only be tied outside of their company, but also in high-risk startups, oftentimes in companies that are chasing really unproven ideas with a high risk of failure.

oftentimes in companies that are chasing really unproven ideas with a high risk of failure. And Altman has funded some of his investments by taking out a debt line from his bank. What's enabled Altman to invest so much money is this very unconventional strategy of taking on debt to invest into startups. Most founders, even if they're quite wealthy, don't have enough money to invest in other companies and are also reluctant to put a lot of their savings into this high-risk asset class. Altman is basically the opposite. He's very comfortable sinking the vast majority of his net worth into other startups, and he's very comfortable taking on a very high level of debt to do it. That sounds kind of risky. It's extremely risky.

I mean, in the world of investing, startups is basically one of the riskiest investments that you can make. And so to take on debt to invest into startups is kind of like doubling the risk. Many of his risky bets have paid off, though. One of his most successful investments came very early in his career, when he invested $15,000 for a 2% stake in a payments company called Stripe.

That company is now worth $65 billion. Altman has been investing in startups for a long time. In 2012, he used the money he made from selling his own startup to create a venture capital fund called Hydrazine. Which is named after the chemical used for rocket fuel. And basically his investing career kind of took off starting from there. What was his goal with Hydrazine? He clearly liked startup investing,

and he kind of just wanted to try his hand at it. And he was really smart. I mean, this was 2012. This was the very early years of what would become basically a 10-year-long tech bull market. And he saw a huge opportunity to invest in promising founders. He was very connected in Silicon Valley. And he was very attracted, like many venture capitalists are, to charismatic founders selling big ideas, promising to change the world. How would you describe Altman's investing style? I think zooming out, and especially over the years,

he's really gravitated towards, you know, capital intensive, ambitious scientific efforts. So not like your typical productivity app or something you've just spun up as a coder, but like really big projects, like he's invested in life extension companies, supersonic aviation companies. So over the years, he's really gravitated towards kind of the big, ambitious, high-risk companies that aren't like your typical software startup. The stuff he thinks is going to change the world rather than change the HR communications market.

Exactly, exactly. And I think he's very open about that. He's kind of like, most startups are kind of boring, and I only want to put my money into the most ambitious companies. In 2014, Altman said he'd invested in 40 companies, and that five of them had increased by 100 times or more in value. That same year, Altman's access to promising investment opportunities got a boost when he was named president of Y Combinator.

Y Combinator is a VC firm that invests in a wide range of startups and offers them help getting off the ground. A lot of founders like from Dropbox and Airbnb and Stripe were all going through the program there. And so he kind of just piggybacked off that network and invested a lot of his money in Hydrazine into Y Combinator founders. So with Hydrazine, he basically invested in a lot of Y Combinator companies. It was genius because he got an inside look at all the hottest companies that Y

Combinator was recruiting and the ones that he liked the most he just invested his own money into them. Yeah, he gets to just sort of like take the cream of the crop. Exactly. So it was like a really smart way to maximize

his upside. Was that okay that he was doing both things at the same time? Or did that create any tensions with Y Combinator? It definitely was a very unconventional arrangement. And it's even weirder because Altman had banned other partners at Y Combinator from also running their own venture funds. It's not a great look. You know, let's say you're a founder

going through Y Combinator. You see other founders getting personal investments from Sam. He's clearly picking favorites. And that might lead you to question whether he's prioritizing certain startups that went through Y Combinator over others, where his interests lie.

So it definitely was a bit of an odd arrangement. Altman was eventually asked to resign from Y Combinator because the partners there thought he was spending too much time on personal projects, including OpenAI, which he co-founded in 2015. While Altman's wealth doesn't come from OpenAI, a lot of his money is tied to startups that do business with OpenAI. That's next. So what's it like to buy your first cryptocurrency on Kraken? Well, let's say I'm at a food truck I've never tried before.

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Non-investment advice. Crypto trading involves risk of loss. See Kraken.com slash legal slash ca dash pru dash disclaimer for info on Kraken's undertaking to register in Canada. On August 9th, don't miss the Borderlands movie starring this summer's biggest cast. Everybody buckle up. With Cate Blanchett, Kevin Hart, Jack Black, Ariana Greenblatt, and Jamie Lee Curtis. Wow, you never see that. Borderlands. Of the more than 400 companies Sam Altman invests in, some have deals directly with OpenAI.

Oftentimes, his largest investments are starting to do business with OpenAI. Oftentimes, his largest investments are starting to do business with OpenAI in very meaningful ways and in ways that raise really pesky questions around conflicts of interest. So one really big example that jumps out is

this deal that OpenAI recently struck with Reddit. Altman and Reddit go way back. Altman is the third largest outside shareholder, and he once served briefly as its CEO. Last month, OpenAI announced a partnership with Reddit, where OpenAI will pay Reddit to access its data, which it will use to inform AI models.

By the way, News Corp, which owns the Wall Street Journal, also has a content licensing partnership with OpenAI. After the Reddit deal was announced, Reddit's stock shot up 10%, and the stake Altman controls went up by $69 million. OpenAI said in a blog post that Altman didn't lead the partnership talks. Look, there's nothing inherently wrong between a conflicted deal as long as it's disclosed properly and the board approves it.

But think about this if you're an Open AI executive who's negotiating this deal with Reddit. You're essentially negotiating against your boss's financial interests. And a very basic rule of capitalism and economics is that people follow incentives. So if Altman is thinking about this deal, he doesn't own any stake in OpenAI, but he owns a multi-million dollar stake in Reddit. Right, like the better this deal is for Reddit, the more money Altman makes. Exactly. So it's extremely awkward, right? Because let's say you're a shareholder and you think that OpenAI is paying Reddit way too much money to license their content.

Maybe it's because in the back of people's minds, they knew that this is a deal, that Altman was on the other side of the deal and they wanted to go easier on Reddit. I mean, these are the types of questions that are really hard to answer. And they're the reason why in corporate governance practice, you want to minimize conflict of interest in general.

Something similar is going on with a company called Helion. Helion is a startup that wants to make nuclear fusion power plants, which as of now is kind of an unproven technology. In 2021, Altman invested $375 million into the company, the largest startup check he's ever written. OpenAI is currently in talks to buy a lot of energy from Helion to power the data centers it needs to develop AI.

At one level, I think he sees a really awesome opportunity to bring together two companies he cares a lot about, reinvent the future. AI is going to take up so much energy, we might as well find a clean solution to it. And he thinks Helion is that solution. But on a secondary level, you're like, okay, let's say Helion announces a deal with OpenAI next month.

Every investor is going to want to invest more in Helion and mark up the valuation of that company. And that would immediately enrich Altman, right? Because he's one of the largest shareholders in Helion. So there are all of these different questions around conflicts that emerge that make these types of deals a little bit questionable. Altman has recused himself from the deal talks between OpenAI and Helion. Altman has also invested in Rain AI, a company that OpenAI agreed to buy AI chips from. He's also invested in Humane,

a company that makes a wearable AI personal assistant that uses OpenAI's technology. And Limitless, a company that makes a wearable AI personal assistant that uses OpenAI's technology. And Limitless, a company that does something similar. You know, most people are motivated by money. So if the money that Altman is making is coming from companies that are not OpenAI, what does that say about where his loyalties actually lie? I mean, look, I think he cares a lot about OpenAI

and cares about the business, but it's hard to exactly know what might motivate him in a particular moment or with a particular deal. You know, he might be doing these deals out of pure idealism. He might be doing these deals because he wants to become rich. We don't really know, right? But that's also part of the, that's what's kind of raising eyebrows, right? Because you usually, when a CEO is running a company, you don't really

ask these questions about where their financial interests lie, which again, goes back to this idea that typical companies, their boards restrict their CEOs from even investing at all, or they're very scrupulous about what they permit their CEOs to do. Through a spokesperson, Altman declined to comment on any potential conflicts of interest. In a statement, OpenAI's board chair Brett Taylor said Altman is fully focused on the company, and that he discloses all potential conflicts of interest to the company's independent audit committee. He said, quote, we carefully manage any potential conflicts

and always put OpenAI and our mission first. The company has also said it recently created a new conflicts of interest policy. It hasn't said exactly what that means. Last fall, OpenAI's board fired Altman. He was quickly rehired and the board was overhauled. The board said at the time that they fired Altman because he wasn't, quote, consistently candid with them. And we've reported that among the concerns that piled up is basically the fact that his

financial interests are so spread out, and the fact that a lot of those investments weren't really disclosed to the board, which made them feel like it was difficult to sort of figure out how his personal interests intersected with the interests of the business. And so you have a CEO who is already struggling with his image. He clearly already has problems in terms of managing his relationship with the board, in terms of conflicts of interest disclosures. CEOs have a fiduciary responsibility, first and foremost, to their shareholders, right? And we've seen lawsuits and litigation against CEOs that over things that even just raise the question

that they're not committed to that. And so when you blend the personal with your professional responsibilities in such a severe way, you know, it just raises these really pesky problems and it opens you up to a lot of risk. And so this is a topic that I think is definitely something that will only grow more important

and intense over time. And so it'll be really interesting to see how it unfolds over the coming years. That's all for today, Thursday, June 20th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Tom Ditton and Keech Hagee. Thanks for listening. See you tomorrow.