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Character.ai is looking to rebound after Google poached its founders in a $2.7 billion deal by focusing on improving its consumer products rather than creating AI models, as concern grows that big tech will crush competition from rival start-ups.
Dominic Perella, the company’s new interim chief executive, told the Financial Times that the San Francisco-based company to start up had largely abandoned the race to create large language models in the face of 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 those designed by users.
“It was becoming incredibly expensive to train pioneer models. . . which is extremely difficult to finance, even with a very large start-up budget,” Perrella said in his first interview since taking office in August.
“Our consumer products were incredibly successful, and there was a dichotomy within the company between people who wanted to focus on building the most advanced models possible and people from the consumer side who saw this product takes off.”
Character.ai’s pivot follows a similar path to other start-ups, such as Germany’s Aleph Alpha, which abandoned its ambition to create LLMs, given the enormous costs involved in developing the technology.
This has sparked concerns that big tech companies are dominating the nascent but growing AI sector. Global regulators are increasingly looking at deals like the $13 billion alliance between Microsoft and OpenAI.
Microsoft’s $650 million agreement in March The decision to hire Inflection director Mustafa Suleyman and other staff from the start-up attracted the attention of the UK’s competition regulator, calling it a “merger situation”, but later been authorized. Amazon’s so-called “acquisition” of Adept executives also attracted the attention of the FTC.
In August, Google hired 20% of Character.ai’s staff to join its AI arm DeepMind and paid $2.7 billion for a sole license to the startup’s models, at the time without access to the technologies. future, according to close sources. with agreement.
As part of the deal, Google rehired Character co-founders Noam Shazeer and Daniel De Freitas. The couple previously left the search giant after refusing to release its AI-powered chatbot. Shazeer is also one of eight Google scientists who co-authored a paper on the “transformative” architecture for language processing that launched the generative AI revolution.
“The concern with Character.ai is that the things it does can easily be replicated by large technology companies with financial muscle and enormous global reach,” said Jamie MacEwan, an analyst at Enders Analysis. “These star founders have been its biggest selling point in the industry. I’m not sure that without them the company can claim to maintain a technological edge.”
Character.ai had previously received buyout interest, including from Facebook and Instagram owner Meta, and last year was valued at $1 billion in a funding round led by Andreessen Horowitz .
Perella hopes the deal with Google will not raise competition concerns, as the group plans to operate in the same market. “We are continuing our research into AI,” he said. “We still own all of our technology, have almost all of our staff, and we continue to grow. »
With the $2.7 billion from the Google deal, Character.ai bought out its investors and divided ownership of the company among employees in a cooperative, a “very unique structure and perhaps unprecedented in Silicon Valley,” Perella said. The interim chief executive’s stake is less than 10 percent, according to a person familiar with the company’s finances, and staff also received a one-off compensation.
The deal also leaves the startup with enough money to operate for 18 months, Perella said, adding that the company would likely look to raise money from venture capital in the future and pursue licensing deals similar with other companies.
Around thirty employees called on Google as part of the transaction, while around a hundred remain. Character.ai also recently laid off 10 people who Perella said were no longer needed by the company, such as recruiters who specialize in hiring engineers who train base models.
Character.ai also poached Erin Teague as its new chief product officer from Google, where she worked as a product manager on its Gemini AI product and YouTube.
Character.ai has a monthly active user base of 20 million, which has doubled year over year, with a predominantly younger user base, aged 13 to 25, Perella said. Its main source of revenue comes from subscriptions, which make up a small percentage of users.
“Over the past few weeks, we have united around this mission of building the next great platform and using AI to power it and using our secret sauce to power it,” he said. he added.