With a return of 2.5 times in two years, who is benefiting from the new model of "acquisition" of AI startups by tech giants?

Tencent Technology

2024-08-09 10:40Posted on the official account of Beijing Tencent News Technology Channel

Highlights:

-- New deal models are emerging in Silicon Valley, where big tech companies are no longer fully acquiring AI startups, but are more interested in talent and technology licensing.

-- Google paid $3 billion to license Character.AI technology instead of outright acquisitions to avoid full ownership of the company.

-- Big tech companies avoid regulatory scrutiny through technology licensing while staying ahead of the curve in the AI space.

--The transaction left behind abandoned corporate entities, and the remaining employees of the startup did not share in the financial benefits of the transaction, raising industry concerns.

Tencent Technology News reported on August 9 that, according to foreign media reports, a new transaction model is emerging in Silicon Valley, involving large technology companies to absorb the core technology and team of artificial intelligence startups through technology licensing and hiring key talents, rather than direct acquisitions. This model not only enables startup founders to continue their technological innovations with the resources of large companies, but also provides investors with a quick path to returns. However, this practice has also raised concerns about the circumvention of regulatory scrutiny, the future of the startup's remaining workforce, and the health of the tech ecosystem as a whole.

Noam Shazeer and Daniel De Freitas, founders of AI startup ·Character.AI ··, left Google in 2022 because they felt the tech giant was moving too slowly. They then founded their own chatbot startup Character.AI and managed to attract nearly $200 million in investment.

Just recently, Chazel and De · Freitas announced that they would return to Google. They have a deal with Google to rejoin Google's AI research arm and bring their startup's technology to Google.

Although Google has acquired technology and talent, it has not acquired Character.AI. Google has chosen an unusual path, agreeing to pay $3 billion to license the Character.AI technology. Of that amount, about $2.5 billion will be used to repurchase Character.AI shares. As the startup's majority shareholder, Chazel expects to earn between $750 million and $1 billion. Character.AI will lose the support of its founders and investors and continue to operate independently.

The deal is representative of a series of unusual recent deals in Silicon Valley. Big tech companies often choose to acquire startups outright, but in the face of younger AI companies, they are beginning to adopt more complex deal structures, licensing technology and hiring top employees to acquire the startup's core technology and talent, without having to become the official owner of the company.

Behind this deal model is Big Tech's attempt to avoid regulatory scrutiny while staying ahead of the curve in the AI space. Companies such as Google, Amazon, Meta, Apple, and Microsoft are being closely watched by regulators such as the Federal Trade Commission to determine whether they are restricting competition in the market, for example, by acquiring startups.

·Justin Johnson, a business economist at Cornell University who focuses on antitrust issues, noted that big tech companies may be trying to avoid regulatory scrutiny by not directly acquiring target companies, but these deals are actually starting to look like regular acquisitions.

Google said it was "very excited" about the return of Chazel and some of his colleagues, but declined to comment on the issue of antitrust censorship. Just this Monday, a federal judge issued a landmark ruling that found that Google had abused its online search monopoly in violation of antitrust laws.

Microsoft is setting a precedent

Since the rise of the AI boom in late 2022, it has changed the landscape of tech deals. Investors initially raced to inject capital into AI startups at high valuations, which led to an unusually frenetic pace of investment. However, the excitement has cooled as some high-profile AI startups have failed to succeed, creating opportunities for big tech companies to step in with non-traditional deals.

Microsoft kicked off the trend in March, agreeing to pay more than $650 million to license technology from artificial intelligence startup Inflection and hiring nearly all of its employees, including the company's founder, Mustafa Suleyman, · and chief scientist Kar·én Simonyan. Suleiman now leads Microsoft's consumer AI business. Amazon struck a similar deal with artificial intelligence startup Adept in June, which brought many technologists, including the company's founder, David ·Luan, to the company.

Regulators are watching these deals. The FTC said it is conducting extensive research into AI deals between startups and Microsoft, Amazon and Google. In addition, it is also investigating whether Microsoft should notify regulators about the Inflection deal, which would subject the arrangement to more direct scrutiny.

There are rewards and hidden dangers

Silicon Valley has embraced these unusual deals because they allow startup founders to continue to develop their technology with the resources of large companies without having to worry about finances. These deals can also provide investors with quick returns. For example, Character.AI investors made a 2.5x return just two years after the Google licensing deal.

However, these transactions also leave some problems, such as the corporate entities and employees that are left behind. Some tech investors and entrepreneurs have expressed concern that if company founders and employees don't get the returns they deserve from these deals, it will negatively impact the health of the entire ecosystem.

It's unclear how the companies left behind will evolve. In Character.AI, General Counsel Domin·ic Perella became interim CEO. The startup says it is "committed to serving our users with innovative new products." At Adept, the team working on product, sales and other areas did not join Amazon, and Zach Brock, a former head ·of engineering, took over as CEO. The company is currently trying to license its technology to other companies. Inflection also hired a new CEO, but only two employees remained, and the rest — about 70 people — joined Microsoft. Inflection used $650 million in licensing fees provided by Microsoft to repay its investors.

As the AI industry continues to grow, more similar deals are expected to emerge in the future. Many AI startups have raised huge sums of money on ambitious targets, while large acquirers are still eager to pay for the best talent, ideas, and products. At the same time, some startups are having trouble making money and competing with large companies, so they may prefer to negotiate deals.

Investor Matt · Turck said he hoped such deals would not continue because they created a chaotic structure that undermined consistency between founders, employees and investors. As the AI industry continues to evolve, we are likely to see more of these deals and their impact on the industry landscape and innovation ecosystem. "Founders and investors are realizing that not every high-profile AI startup with a great founder is going to be the next OpenAI or Google," Tucker said. (Compiler/Mowgli)

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