SAN FRANCISCO — In 2022, Noam Shazeer and Daniel De Freitas left their jobs developing artificial intelligence at Google. They said the tech giant moved too slowly. So they created Character.AI, a chatbot startup, and raised nearly $200 million.
This month, Shazeer and De Freitas announced that they were returning to Google. They had struck a deal to rejoin its AI research arm, along with roughly 20% of Character.AI’s employees, and provide their startup’s technology, they said.
But even though Google was getting all that, it was not buying 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 then be used to buy out Character.AI’s shareholders, including Shazeer, who owns 30% to 40% of the company and stands to net $750 million to $1 billion, the people said. What remains of Character.AI will continue operating without its founders and investors.
The deal was one of several unusual transactions that have recently emerged in Silicon Valley. While big tech companies typically buy startups outright, they have turned to a more complicated deal structure for young AI companies. It involves licensing the technology and hiring tGoogle, Amazon, Meta, Apple and Microsoft are under a magnifying glass from agencies like the Federal Trade Commission over whether they are squashing competition, including by buying startups.he top employees — effectively swallowing the startup and its main assets — without becoming the owner of the firm.
These transactions are being driven by the big tech companies’ desire to sidestep regulatory scrutiny while trying to get ahead in AI, said three people who have been involved in such agreements.
“Large tech firms may clearly be trying to avoid regulatory scrutiny by not directly acquiring the targeted firms,” said Justin Johnson, a business economist who focuses on antitrust at Cornell University. But “these deals do indeed start to look a lot like regular acquisitions.”
In a statement, Google said it was “thrilled” that Shazeer was returning alongside some of his colleagues and declined to comment on antitrust scrutiny. On Monday, a federal judge issued a landmark ruling that found 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 earlier reported on the deal’s details.
Since the AI boom took off in late 2022, it has transformed tech deals. Investors initially raced to pour money into AI startups at high valuations. That led to an unusually frenzied pace, with startups such as Anthropic raising large sums frequently and agreeing to various funding conditions, such as using chips and cloud computing services from the companies that invested in them.
That excitement cooled as 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 the trend in March when it agreed to pay the AI startup Inflection more than $650 million to license its technology and hire almost all of its employees, including its founder, Mustafa Suleyman. Suleyman, an AI veteran, now leads Microsoft’s consumer AI business.
In June, Amazon inked a similar deal with the AI startup Adept, bringing on 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 paying back the $414 million that 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 AI 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 arrangement to more immediate scrutiny, a person with knowledge of the matter said.
On Thursday, Britain’s antitrust regulator said it was investigating an investment deal that Amazon had made with Anthropic.
Silicon Valley has embraced the unusual deals 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 transactions can also provide a fast return for investors. Investors in Character.AI, which was privately valued at $1 billion, made a 2-1/2-times return from the Google licensing deal after just two years. With the Adept and Inflection deals, most investors got their money back, people familiar with the transactions said.
Yet the transactions have also left behind orphaned corporate entities, stranding remaining employees at startups where the founders and investors have moved on. Those employees do not get to partake in the financial spoils of these deals.
That has caused consternation among some tech investors and entrepreneurs.
“If you build a company and you take on money from investors, every person involved deserves to be rewarded,” said Sebastian Thrun, an AI researcher and serial entrepreneur known for founding Google’s self-driving car project. “This is why Silicon Valley emerged. If you water things down, it will be hard for the ecosystem to survive.”
Matt Turck, an investor at the venture firm FirstMark Capital, said he hoped these types of deals would not continue because they created “a messy structure that breaks down the alignment” of founders, employees and investors.
It is unclear how the left-behind companies 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 agreement said. Amazon hired only the researchers who built Adept’s AI technology. The startup’s former head of engineering, Zach Brock, has since taken over as CEO, and the company is trying to license its technology to other firms, according to a recent pitch sent to prospective partners that was viewed by The New York Times.
Inflection has also hired a new CEO, but just two employees stayed on while the rest — roughly 70 people — joined Microsoft. Inflection used the $650 million licensing fee from Microsoft to reimburse its investors, who had poured $1.5 billion into the company.
More of these deals may surface. Many AI startups have raised huge sums on wildly ambitious goals, and large acquirers 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 to compete with the bigger players, so they may be more willing to entertain deal talks.
“Founders and investors realize that not every high-profile AI startup with great founders is going to be the next OpenAI or Google,” Turck said.
This article originally appeared in The New York Times.
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