AI Deal: The New AI Deal: Buy Everything But the Company

In 2022, Noam Shazeer and Daniel De Freitas left their jobs developing artificial intelligence at GoogleThey said the tech giant was moving too slowly, so they created Character.AIa chatbot start-upand raised nearly $200 million.

Last week, Shazeer and De Freitas announced they were returning to Google. They had reached an agreement to rejoin its AI research division, along with about 20% of Character.AI employees, and provide their startup with technologythey said.

But even though Google achieved all of that, it did not acquire Character.AI.

Instead, Google agreed to pay $3 billion to license the technology, two people with knowledge of the deal said. About $2.5 billion of that sum will be used to buy out Character.AI shareholders, including Shazeer, who owns 30% to 40% of the company and could earn $750 million to $1 billion, the people said. Whatever remains of Character.AI will continue to operate without its founders and investors.

The deal was one of several unusual transactions that emerged recently in Silicon Valley. While large technology companies While they typically buy startups outright, they have turned to a more complicated deal structure for young AI companies. It involves licensing the technology and hiring top employees (thus gobbling up the startup and its core assets) without becoming the firm’s owner.

These transactions are being driven by Big Tech companies’ desire to avoid regulatory scrutiny as they try to make headway in the field of artificial intelligence, said three people who have been involved in such deals. Google, Amazon, Meta, Apple and Microsoft are under scrutiny by agencies such as the Federal Trade Commission to determine whether they are stifling competition, including by buying startups.

“Big tech companies may clearly be trying to avoid regulatory scrutiny by not directly acquiring the companies in question,” said Justin Johnson, a business economist who specializes in antitrust at Cornell University. But “these deals are in fact starting to look a lot like normal acquisitions.” In a statement, Google said it was “thrilled” to have Shazeer return along with some of his colleagues and declined to comment on the antitrust scrutiny. On Monday, a federal judge issued a landmark ruling finding that Google had violated antitrust law by abusing a monopoly in online search.

A Character.AI spokesperson declined to comment beyond the announcement of the Google deal. The Information previously reported on the details of the deal.

Since the artificial intelligence boom took off in late 2022, it has transformed tech transactions. At first, investors rushed to pour money into AI startups at high valuations. That led to an unusually frenetic pace, with startups like Anthropic frequently raising large sums and agreeing to various financing terms, such as using chips and cloud computing services from the companies that invested in them.

That enthusiasm cooled when it became clear that some high-profile AI startups would not succeed, creating an opportunity for big tech companies to swoop in with nontraditional deals.

Microsoft kicked off this trend in March, when it agreed to pay AI startup Inflection more than $650 million to license its technology and hire nearly all of its employees, including its founder, Mustafa Suleyman. Suleyman, an AI veteran, now runs Microsoft’s consumer AI business.

In June, Amazon signed a similar deal with artificial intelligence startup Adept, bringing on board many of its employees, including its founder, David Luan.

Amazon paid Adept at least $330 million to license its technology, with much of the money going toward returning the $414 million the startup had raised from investors, three people with knowledge of the transaction said. Amazon also offered a $100 million retention bonus to Adept employees who joined, the people said.

Regulators are watching. The FTC is working on a broad study of artificial intelligence deals between startups and Microsoft, Amazon and Google, the agency said in January. It is also investigating whether Microsoft should have notified regulators about the Inflection deal, which would have subjected the deal to more immediate scrutiny, a person familiar with the matter said.

On Thursday, Britain’s antitrust regulator said it was investigating an investment deal Amazon had made with Anthropic.

Silicon Valley has welcomed these unusual arrangements because startup founders can continue working on their technology with the resources of a large company, without worrying about making money on their own.

The deals can also provide quick returns for investors. Investors in Character.AI, which was valued at $1 billion, earned a return of 2.5 times the value of the Google deal after just two years. With the Adept and Inflection deals, most investors got their money back, people familiar with the transactions said.

However, the transactions have also left corporate entities orphaned, leaving employees left behind at startups where founders and investors have left. Those employees are unable to share in the financial benefits of these deals.

This has caused consternation among some investors and technology entrepreneurs.

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

Matt Turck, an investor at venture capital firm FirstMark Capital, said he hoped such deals would not continue because they created “a messy structure that breaks the alignment” of founders, employees and investors.

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

At Adept, teams working on product, sales and other areas did not join Amazon, a person familiar with the deal said. Amazon hired only the researchers who developed Adept’s artificial intelligence technology. The startup’s former engineering chief, Zach Brock, has since taken over as chief executive, and the company is seeking to license its technology to other companies, according to a recent proposal sent to potential partners seen by The New York Times.

Inflection has also hired a new CEO, but only two employees stayed while the rest (about 70 people) joined Microsoft. Inflection used the $650 million from the Microsoft license to repay its investors, who had invested $1.5 billion in the company.

More such deals may emerge. Many AI startups have raised huge sums of money with extremely ambitious goals, and big buyers remain eager to pay for the best talent, ideas and products. At the same time, some of the startups are struggling to make money and compete with the bigger players, so they may be more willing to enter into deal talks.

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