Major technology firms have shut down three promising artificial intelligence startups prior to now six months and developed a brand new M&A playbook that threatens to push enterprise capitalists to the brink of the AI boom.
Chatbot makers Inflection and Character.AI and AI agent developer Adept had collectively raised greater than $2 billion in funding before their top talent was poached by Microsoft, Google and Amazon, respectively.
After these three deals, the large technology firms acquired the founders, researchers and engineers of the start-ups in addition to licenses for his or her products. The enterprise capitalists, however, roughly ended up back where they began.
Their early exit is a grim sign for other AI startups attempting to develop their very own large-scale language models – the systems that underpin OpenAI's ChatGPT and Google's Gemini.
The deals will reinforce enterprise capitalists' concerns that the winners of the AI boom shall be the most important technology firms that may bear the multi-billion dollar costs of developing cutting-edge AI systems.
Earlier this month, Google agreed to sign Character.AI co-founders Noam Shazeer and Daniel De Freitas and license the startup's celebrity-impersonating chatbots. Character's founders and other shareholders, the most important of which is Silicon Valley enterprise capital firm Andreessen Horowitz, will reportedly receive $2.5 billion as a part of the deal.
This values Character at 2.5 times its March 2023 price of $1 billion – a good but unspectacular return for investors who’ve invested nearly $200 million within the startup since its founding in 2022.
The merger of Microsoft and Inflection and the Adept take care of Amazon were even less lucrative for the enterprise capitalists of the 2 start-ups. They barely got back greater than their original investment, say people acquainted with the transactions.
The deals have provided “pretty decent” salaries for the founders who work for the large technology firms, says Mike Volpi, a partner at enterprise capital firm Index Ventures. But for the enterprise capitalists, they’re “not good results.”
Since nearly all of all start-ups fail, enterprise capitalists depend on a handful to be so successful that their miscalculations are covered persistently over.
“VCs, especially those with larger funds, need above-average results (and) 2.5x your investment … is admittedly not very useful for a single company,” said Volpi, whose firm has invested in various AI firms, including Cohere and Mistral.
Less than two years after the launch of OpenAI's powerful chatbot ChatGPT sparked a flood of AI investment, many founders who left their corporate jobs to launch startups have returned to the arms of huge tech firms.
Shazeer and De Freitas criticized Google's slow pace after they left the corporate to start out Character in 2022, but ultimately returned. Several Adept executives and Inflection founder Mustafa Suleyman were all Google researchers before founding their firms. They now work at Amazon and Microsoft, respectively.
The acquisition of the three firms by giant technology conglomerates underscores how difficult it’s to scale an AI start-up. The resources required to coach and run cutting-edge AI models are enormous, and start-ups without established sales channels struggle.
According to David Cahn, partner at enterprise capital firm Sequoia Capital, these challenges are prone to change into more acute in the subsequent phase of AI development.
Over the past yr, startups have tried to get a head start through the use of novel research techniques or higher training data. “The next phase of the AI race will look different: It shall be defined more by physical engineering than by scientific discovery,” Cahn wrote in a recent Blogwhile AI firms race to construct massive data centers costing billions of dollars each to develop more powerful models.
This would likely profit major technology firms, which increased their annual capital spending from $138 billion to $229 billion last yr, he added.
Even startups which have remained independent rely heavily on partnerships with large tech firms. Microsoft has committed $13 billion to OpenAI; Amazon and Google have invested a combined $6 billion in Anthropic. Smaller players like Cohere and Mistral have also entered into partnerships with large tech firms.
Access to the computing resources and customers of the large tech firms gives startups developing large language models “an inherent advantage,” says Raviraj Jain, partner at Lightspeed Venture Partners. While only a handful of firms can afford to compete at that level, there remains to be room for venture-backed startups to develop smaller AI models, applications and infrastructure.
Regulatory intervention could shift the balance again. Antitrust authorities within the US and Europe are currently reviewing deals with Amazon, Google and Microsoft – despite efforts to structure the agreements in order that the start-ups remain nominally independent. Last month, the UK Competition and Markets Authority announced an investigation into Microsoft's take care of Inflection.
Venture capitalists indicate that consolidation and crashes are typical within the early stages of a technology boom. Even the dot-com bust of the late Nineties couldn't stop the Internet from becoming ubiquitous, and the preferred consumer applications didn't appear until years after the introduction of the smartphone.
“We are undoubtedly going through a difficult time for enterprise capital, with all the joy concentrated in a single sector,” Volpi said. “But there are a whole bunch of firms doing a number of interesting projects in AI. There are going to be some needles in that big haystack.”
