Otto was born in Cologne to Nikolaus August Otto, the founder of N. A. Otto & Cie. and inventor of the four-stroke internal combustion engine. It is therefore regarded that his interest in engines, specifically aircraft and the manufacture thereof, was something he inherited from his father at an early age.
Gustav competed successfully in cars and on motorcycles in various sports events. He was also very active in the earliest days of aviation. On 10 April 1910 he obtained his pilot's license on an Aviatik biplane (also he took over an agency for this aircraft). He founded the "Aeroplanbau Otto-Alberti" workshop (renamed "Gustav Otto Flugmaschinenfabrik" in 1911) at the Puchheim airfield. in 1910, Gustov built a biplane he designed; it created a sensation throughout Germany. Gustav, along with a few others, flew machines made of wood, wire, canvas and powered by Daimler aeroengines. Gustav sold over 30 aircraft through his company, which also included a flight school. Through their passion for these flying machines, they helped transform aviation from a do-it-yourself hobby to a genuine industry vital to the military, especially after the breakout of World War I. Interestingly, Ernst Udet, the second-highest scoring German flying ace of World War I (second only to the Red Baron), earned his pilots license from private training with Gustav at this time.
Gustav founded numerous companies for the purpose of building aircraft. For his first company, the following entry was recorded in the Munich Company Register under the number 14/364 on 15 March 1911: "Gustav Otto in Munich, Flugmaschinenfabrik (aircraft factory), Office Karlstrasse 72". Shortly afterwards, Otto moved the workshop from its original location at 37, Gabelsberger Strasse to its new premises at 135, Schleissheimer Strasse, and in 1913 started to construct a new factory at 76, Neulerchenfeldstrasse (later Lerchenauer Strasse)at the Oberwiesenfeld (the business was renamed "Otto-Werke" in 1915).
In 1913, after selling 47 aircraft to the Bavarian Army, Gustav opens his factory Otto-Flugzeugwerke on Lerchenauer Strasse just east of the Oberwiesenfeld troop maneuver area in the Milbertshofen district of Munich(this area later became Munich's first airport). He wanted to be closer to the German government's procurement process for military sale. However, Gustav was not skilled at the politics and payoffs associated necessary when dealing with the Bavarian war ministry and Prussian Army. Unable to navigate these politics without leaving his pride and integrity intact deeply troubled Gustav.
Shortly after 1914, Otto established another company named AGO Flugzeugwerke at Berlin's Johannisthal Air Field. The initials AGO stood for either Actien-Gesellschaft Otto or Aerowerke Gustav Otto there seems to be some ambiguity but the company mostly license-built Otto Flugmaschinenfabrik designs,(as did Pfalz Flugzeugwerke) during the early years of World War I. The designs by Gustav Otto were initially successful, but Otto was continually experiencing problems related to cost-effective production, as well as generating profits. At the start of the war, Otto-Flugzeugwerke was supplying the German Air Force, but the production problems ended up being so great that the government agencies urged the company to solve the issues. The stress of wartime seemed to prove too great a burden for Gustov who suffered health issues which led to financial problems with the company. In 1915 he was admitted to a Munich mental hospital for treatment of clinical depression (as it is called today). As he was being treated, the company languished to the edge of bankruptcy. Eventually, Otto was forced to resign from the business and was offered a buyout that would compensate him for the business as well as his medical bills. The assets were finally taken over by a consortium which incorporated them into Bayerische Flugzeugwerke on 19 February 1916. Gustav Otto no longer had a stake in this company. He turned his attention instead to Otto-Werke Flugzeug- und Maschinenfabrik GmbH, which was founded on 1 February 1916, just before Otto-Flugzeugwerke was taken over by the consortium. This new company was not in any way connected with the newly established company.
After the First World War, Otto started a new attempt with in the automobile manufacturing area with the Starnberger Automobilwerke. The luxury "Otto-Mercedes" car built there is alleged to have been well received abroad. During this time, he was divorced from his wife Ada in 1924, an event under which Otto suffered badly. Ada remarried, but in August 1925 died in mysterious circumstances that gave rise to much speculation. Despite the fact he was no longer married to her, Otto took her death most harshly and apparently fell into a deep depression.
In 1926, amid failed attempts at business (caused by various reasons), the death of his wife, and health issues, Otto committed suicide at the age of 43.