SAN FRANCISCO — Google hired the co-founders of Character.ai, a prominent artificial intelligence start-up whose personalized chatbots were popular among young people, reigniting concerns that even well-funded start-ups can’t compete with the dominant tech companies that hold sway over the technology expected to rewire work and play.
Noam Shazeer and Daniel De Freitas, two highly respected AI researchers, left Google in 2022 to start Character and in March last year the company was valued by investors at $1 billion. They will now return to Google, along with some of their employees, the start-up said in a blog post Friday, and Google will pay Character to access its AI technology. The start-up will in the future tap AI systems developed by other companies in addition to its own.
The deal is strikingly similar to two others that have received scrutiny from regulators for potentially skirting antitrust laws. In March, Microsoft hired away the head of Inflection AI, another chatbot start-up that had received substantial funding, and agreed to pay the company for its technology. In June, Amazon announced a similar arrangement with Adept AI, a start-up founded by former Google and OpenAI engineer David Luan. Google and Character declined to comment on the terms of their deal.
The deals that have gutted the founders from top start-ups underscore how difficult it appears to be to build successful businesses in artificial intelligence, despite the recent surge of investment into the technology. Top AI researchers can demand huge paychecks and training the algorithms behind apps like ChatGPT can require spending hundreds of millions of dollars on computer chips and the electricity needed to power them.
Start-ups attempting to go it alone can be forced to pay giants such as Google, Microsoft and Amazon for access to chips via cloud computing services while also competing with those companies in AI development. At the same time, even some of the largest companies are still struggling to find ways to make big profits with AI.
While Big Tech companies can afford to fund AI development with their existing businesses, start-ups burning investment dollars generally have to make the technology pay off much sooner. Character’s chatbots had proved popular with teens, including for romantic or even explicit conversations, but the company had not shared details of how its business performed.
“There’s no future for companies that hit scale without profitability,” said angel investor Zak Kukoff. “Big tech can afford to scale without strong economics, which dampens the ability of smaller companies to compete.”
OpenAI and Anthropic, the two most prominent AI start-ups, both rely on funding from dominant public tech companies. Microsoft invested billions in OpenAI in early 2023 and also resells the company’s technology to its many cloud computing clients. Anthropic took money from both Google and Amazon in 2023. (Amazon founder Jeff Bezos owns The Washington Post.)
Buying up talent from leading start-ups in deals dubbed “acqui-hires” played a major role in getting companies like Google, Microsoft and Amazon to their current massive sizes. But as the Biden administration has increased its scrutiny of mergers and acquisitions, tech executives have complained that it’s become harder for companies to outright buy smaller competitors.
The unusual structure of deals like the one Google made to hire Character’s founders has prompted some tech insiders and federal regulators to suggest they may be designed to try to evade antitrust pressure. The Federal Trade Commission is investigating whether Microsoft structured its deal with Inflection to skirt antitrust rules, The Post reported in June.
The FTC also asked Amazon for more information on its deal with Adept, Reuters reported in July. A spokesperson for the FTC declined to comment on Google’s deal with Character. Google’s 2023 investment in Anthropic is also under scrutiny from British competition regulators.
Kukoff termed deals like the one Google struck with Character “acquisitions in all but name,” in a post on X on Friday, and wrote that the tech industry was experiencing “an epidemic of talent heists.” The Information reported that Google paid Character’s investors about $2.5 billion and is taking on around 30 of the start-up’s 130 employees. If the deal had been a conventional acquisition, a transaction of that size would be Google’s sixth largest buyout in its history.
Sarah Wang, a general partner at Andreessen Horowitz, which in March 2023 led a $150 million round of funding into Character, congratulated Shazeer and the Character AI team in a post on X on Friday. “It’s been a privilege to be on this journey with you this past year,” Wang said. A spokesperson for Andreessen Horowitz declined to comment further on the deal.
More top AI start-up founders may also end up on the rosters of their giant competitors in future. Mike Knoop, co-founder and head of AI at the software company Zapier, said deals like the one struck with Character underline how important top AI engineers are to major tech companies. “One thing these deals are showing is the scarcity of great AI research talent,” he said. “This is further evidence all the big AI teams know they need research breakthroughs still.”