Character.ai abandons making AI models after $2.7bn Google deal
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Character.ai is seeking to rebound from Google poaching its founders in a $2.7bn deal by focusing on improving its consumer products rather than building AI models, as concern grows that Big Tech will squash competition from rival start-ups.
Dominic Perella, the company’s new interim chief executive, told the Financial Times that the San Francisco-based start-up had largely abandoned the race to build large language models against better-funded competitors such as Microsoft-backed OpenAI, Amazon and Google.
Instead, three-year-old Character.ai will focus on its popular consumer product, chatbots that simulate conversations in the style of various characters and celebrities, including ones designed by users.
“It got insanely expensive to train frontier models . . . which is extremely difficult to finance on even a very large start-up budget,” said Perrella in his first interview since taking the role in August.
“Our consumer products got incredible traction, and you had a bit of a dichotomy inside the company of folks who wanted to focus on training the most cutting-edge possible models versus folks who came from a consumer background seeing this product take off.”
Character.ai’s pivot follows a similar path to other start-ups, such as Germany’s Aleph Alpha, which has given up ambitions of building LLMs, given the huge costs involved in developing the technology.
That has led to concern that Big Tech companies are dominating the nascent but burgeoning AI sector. Global regulators have increasingly looked into deals such as Microsoft’s $13bn alliance with OpenAI.
Microsoft’s $650mn deal in March to hire the Inflection chief Mustafa Suleyman and other staff from the start-up attracted attention from the UK’s competition regulator as a “merger situation” but was later cleared. Amazon’s so-called “acquihire” of executives at Adept has also attracted FTC scrutiny.
In August, Google hired 20 per cent of Character.ai’s staff to join its AI arm DeepMind, and paid $2.7bn for a one-off license to the start-up’s models at the time with no access to future technologies, according to people familiar with the deal.
As part of the deal, Google rehired Character’s co-founders Noam Shazeer and Daniel De Freitas. The pair had previously left the search giant after it refused to release its AI-powered chatbot. Shazeer is also one of the eight Google scientists who co-wrote a paper on the “transformer” architecture for processing language that kick-started the generative AI revolution.
“The worry for Character.ai is the things it is doing can easily be replicated by big tech firms with financial firepower and huge global reach,” said Jamie MacEwan, an analyst at Enders Analysis. “Those star founders were its biggest selling point in the industry, I’m not sure if without them it can pretend to hold on to a technological edge.”
Character.ai had previously received takeover interest including Facebook and Instagram owner Meta, and last year was valued at $1bn in a funding round led by Andreessen Horowitz.
Perella is hopeful the Google deal will not cause antitrust concerns as it plans to operate within the same market. “We’re continuing to do AI research,” he said. “We still own all of our technology, have almost all of our people and we are continuing to grow.”
With the $2.7bn from the Google transaction, Character.ai bought out its investors and distributed the ownership of the company among employees in a co-operative, a “very unique structure and maybe unheard of in Silicon Valley,” said Perella. The interim chief executive’s stake is less than 10 per cent, according to one person with knowledge of the company’s finances, and staff also received a one-off payout.
The deal also left the start-up with enough money to run for 18 months, Perella said, adding that the company would probably look to raise money from venture capital in the future and seek similar licensing arrangements with other companies.
Character.ai has a monthly active user base of 20mn, which has doubled year on year, with a predominantly younger user base aged 13-25, Perella said. Its main line of revenue is from subscriptions, which make up a small percentage of users.
“Over the past few weeks, we coalesced around this mission of creating the next big platform and using AI to power it and using our secret sauce to power it,” he added.
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