IA: Google buys technology but fires company – 2024/08/10 – Tec

In 2022, Noam Shazier and Daniel de Freitas left their jobs developing artificial intelligence at Google, saying the tech giant was moving too slowly. So they founded Character.AI, a chatbot startup, and raised nearly $200 million.

Last week, Shazier and de Freitas announced their return to Google. They reached a deal to join the company’s AI research arm, along with about 20% of Character.AI’s staff, and provide technology to their startup.

But even with all this in mind, Google didn’t buy Character.AI.

Instead, Google agreed to pay $3 billion to license the technology, two people familiar with the deal said. About $2.5 billion of that will be used to buy out Character.AI shareholders, including Shazeer, which owns 30% to 40% of the company and is worth between $750 million and $1 billion, they said. The rest of the company will continue to operate without its founders and investors.

The deal was one of several unusual ones to emerge in Silicon Valley recently. Big tech companies typically buy startups outright, but they have turned to a more complex deal structure for young AI companies. That involves licensing technology and hiring key employees — effectively swallowing up the startup and its key assets — without taking ownership of the company.

Such deals are driven by the desire of big tech companies to skirt regulations as they try to develop artificial intelligence, three people involved in such deals said. Google, Amazon, Meta, Apple and Microsoft are all under the microscope of agencies like the FTC to see if they are stifling competition, which includes buying up startups.

“It’s clear that Big Tech may be trying to avoid regulation by not directly acquiring the target companies,” said Justin Johnson, a business economist who focuses on antitrust at Cornell University. But “these deals are starting to look a lot like regular acquisitions.”

Google said in a statement it was “pleased” to have Shazier back, along with some of his colleagues, and declined to comment on the antitrust scrutiny. A US federal judge on Monday (5) issued a landmark ruling finding Google guilty of violating antitrust law by abusing its monopoly in online searches.

A spokesperson for Character.AI declined to comment. The information previously reported details of the deal.

Since the AI ​​boom of late 2021, tech companies have changed. Investors initially rushed to invest in AI startups at high valuations. This has led to an unusually frenetic pace, with startups like Anthropic often raising large sums and agreeing to different financing terms, such as using chips and cloud computing services from the companies they have invested in.

That excitement dissipated when it became clear that some of the high-profile startups would not succeed, creating an opportunity for big tech companies to enter unconventional businesses.

Microsoft started the trend in March, agreeing to pay more than $650 million to AI startup Inflection to license its technology and hire nearly all of its employees, including founder Mustafa Suleyman, a veteran who now leads Microsoft’s consumer AI business.

In June, Amazon struck a similar deal with startup Adept, bringing on several of its employees, including founder David Luan.

Amazon paid Adept at least $330 million to license its technology, with much of the money used to repay the startup’s $414 million in funding from investors, three people familiar with the deal said. Amazon also offered a $100 million retention bonus to bright employees who joined.

Regulators are watching. The agency said in January that the Federal Trade Commission was working on a broad review of AI deals between startups and big tech companies like Microsoft, Amazon and Google. A person familiar with the matter said the probe is also looking into whether Microsoft should have notified regulators about the Inflection deal, which would have brought the arrangement under more immediate scrutiny.

The UK antitrust authority said on Thursday (8) that it is investigating an investment deal concluded by Amazon with Anthropic.

Silicon Valley has embraced unusual businesses because startup founders can continue working on their technology, with the resources of a large company, without worrying about making money themselves.

These deals can also provide a quick return for investors, such as the one in the $1 billion private equity firm Character.AI, which saw a 2.5x return from a Google licensing deal.

In both the Adept and Inflection deals, most investors got their money back, people familiar with the matter said. However, the transactions left corporate entities as orphans, with employees at the startups left without their founders and investors. Those employees are not entitled to share in the financial gains from the deals.

This has caused some investors and tech entrepreneurs to panic.

“If you build a company and you get money from investors, everyone involved deserves to be rewarded,” said Sebastian Thrun, an artificial intelligence researcher and entrepreneur best known for founding Google’s self-driving car project. “That’s why Silicon Valley came about. If you dilute things, it’s hard for the ecosystem to survive.”

Matt Turk, an investor at venture capital firm FirstMark Capital, said he expects these types of deals to not go forward because they create a “confusing structure that breaks alignment” between founders, employees and investors.

It’s unclear how the companies she left behind will proceed. At Character.AI, Dominic Perella, general counsel, has become interim CEO. The startup said it is “committed to serving users with new and innovative products.”

At Adept, the product, sales and other teams didn’t join Amazon, a person familiar with the deal said. Amazon hired only the researchers who built the AI ​​technology. The startup’s former head of engineering, Zach Brock, has taken over as chief executive, and the company is looking to license its technology, according to a recent presentation seen by The New York Times.

Inflection also hired a new CEO, but only two employees stayed on, with the rest — about 70 people — joining Microsoft. Inflection used Microsoft’s $650 million licensing fee to reimburse its investors, who had invested $1.5 billion in the company.

More deals like this could be on the cards. Many AI startups have raised large sums with ambitious goals, and big acquirers are still keen to pay for top talent, ideas and products. At the same time, some startups are struggling to make money and compete with the big players, so they may be more willing to consider deals.

“Founders and investors are realizing that not every high-profile AI startup with great founders is going to be the next OpenAI or Google,” Turk said.