AI startups have attracted billions of dollars in funding in the past year in the hope that the investment will soon pay off. However, this did not happen and now many of them have to fight for survival, turning to large technology companies for help, writes The Wall Street Journal.
Thus, the startup Character.AI announced a deal with Google to use its technology, as part of which part of its staff, as well as co-founders Noam Shazeer and Daniel De Freitas, will join the staff of the search giant. Also under the terms of the deal, Google will pay the startup a $2 billion licensing fee, which will allow it to repay early investors, people familiar with the matter said. According to a WSJ source, the companies discussed the possibility of a direct acquisition, but came to the conclusion that in this case it was unlikely to do without a regulatory investigation.
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The new type of deal, which is effectively an acquisition but is not technically an acquisition, circumvents the typical regulatory process at a time when regulators are tightening their grip on big tech companies’ efforts to expand their influence in the generative AI market.
The Adept AI startup entered into a similar deal in June with Amazon, which committed to hire most of the startup’s employees and pay about $330 million for licensing the technology, informed sources told the WSJ. This was enough to pay off investors, along with Adept AI’s remaining funds. Although the startup itself, which was valued at $1 billion last year, was counting on a brighter future.
Adept has raised just over $400 million in funding, but the cost of creating its technology has exceeded the expectations of its founders, the WSJ whistleblower said. This spring, the startup approached a number of companies, including Microsoft and Salesforce, and eventually struck a deal with Amazon. Adept now has about 25 employees remaining, and the startup will now focus on using and selling existing technologies without developing new ones.
Microsoft pulled off a similar deal in March, hiring almost all of AI developer Inflection’s employees to start a new consumer AI division and paying about $650 million to license the technology. However, this deal has already attracted the interest of the British regulator.
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Investors are predicting further acquisitions of AI startups, both real and fictitious, since the payback period for AI technologies has turned out to be much longer than they expected, and now they have to think about survival. A rescue by a tech giant is better than being shut down, but it’s far from the disruption to the tech industry’s status quo that investors were betting on, the WSJ noted. Instead, tech giants have further strengthened their influence in the AI market.
According to WSJ sources in the AI industry, the US administration’s strengthening of measures to block technology mergers and acquisitions was one of the reasons for the unusual deals with Character, Adept and Inflection. So-called acqui-hires deals, in which a large company buys a startup primarily to hire its employees, are nothing new in Silicon Valley. But hiring key startup employees and receiving its technology in exchange for a licensing fee is different from this type of deal, allowing the company to get what it wants without the need for regulatory approval.
However, according to sources, the US Federal Trade Commission (FTC) is examining both the Amazon-Adept deal and the Microsoft-Inflection deal to determine whether the buyer intended to avoid government approval through the agreement. In the UK, regulators raised questions about Amazon’s $4 billion investment in AI startup Anthropic.