Microsoft is actively exploring acquisitions of artificial-intelligence startups as the software giant prepares for a future less dependent on its long-time partner OpenAI, according to five sources familiar with the matter.

The potential deals are aimed at bolstering the company's AI talent pool and advancing its goal of developing a cutting-edge AI model by next year, three sources said.

This spring, Microsoft considered buying code-generation startup Cursor but backed away due to internal fears of regulatory pushback given its ownership of GitHub Copilot, sources said.

Microsoft is now in talks with Inception, a small startup built by a Stanford University team that uses a novel approach to large language models, three sources said. Inception, founded in mid-2024, raised a $50 million seed round in late 2025, with Microsoft's venture fund M12 participating.

The discussions are ongoing and may not lead to a deal, the sources said.

Heated Market

Microsoft faces stiff competition for deals from other tech giants, notably Elon Musk's SpaceX. SpaceX bought Musk's AI research startup xAI in February and announced a deal with Cursor shortly after Microsoft walked away. SpaceX also courted Inception, which has hired a bank to negotiate a deal and is seeking a price tag exceeding $1 billion, sources said.

Meanwhile, AI researcher compensation can soar to tens of millions of dollars, and startup valuations are climbing as investors race for positions in promising AI technology.

A Tall Order

Catching up to frontier labs like OpenAI is a monumental challenge. Some of the most advanced AI models now boast roughly 10 trillion parameters - up from about 1 trillion three years ago.

Inception's models use a technique called diffusion, more commonly used for generating images and videos, which generates and refines multiple text tokens at once, significantly boosting speed. However, diffusion can be unpredictable, and its scalability to massive models remains uncertain, researchers caution.

Any deals would add to work already underway at Microsoft, including teams led by DeepMind co-founder Mustafa Suleyman.

Microsoft and OpenAI: A Shifting Relationship

Microsoft and OpenAI have been partners since 2019, when Microsoft invested $1 billion in the then-unknown lab. OpenAI's ChatGPT launch in late 2022 made Microsoft an AI pioneer and boosted its Azure cloud business. Microsoft has invested $11.8 billion of its promised $13 billion, and has spent over $100 billion on the partnership and infrastructure, the company disclosed.

The initial deal gave Microsoft exclusive access to OpenAI's technology and guaranteed OpenAI computing resources. But tensions grew as OpenAI's needs outstripped Microsoft's capacity, and Microsoft was contractually barred from building a competing foundation model. The contract has been loosened over time.

An amended deal in late 2025 allowed Microsoft to build artificial general intelligence. In late April, a new deal gave OpenAI the freedom to work with Microsoft's rivals, such as Amazon.