Character.AI followed an emerging pattern for ambitious AI startups, trading its leadership to a tech giant in exchange for funds and a strategic makeover.
What’s new: Google hired Character.AI’s co-founders and other employees and paid an undisclosed sum for nonexclusive rights to use Character.AI’s technology, The Information reported. The deal came shortly after Microsoft and Inflection and Amazon and Adept struck similar agreements.
New strategy: Character.AI builds chatbots that mimic personalities from history, fiction, and popular culture. When it started, it was necessary to build foundation models to deliver automated conversation, the company explained in a blog post. However, “the landscape has shifted” and many pretrained models are available. Open models enable the company to focus its resources on fine-tuning and product development under its new CEO, former Character.AI general counsel Dom Perella. Licensing revenue from Google will help Character.AI to move forward.
- Character.AI co-founders Daniel De Freitas and Noam Shazeer, both of whom worked for Google prior to founding Character.AI, returned. (You can read The Batch's 2020 interview with Shazeer here.) They brought with them 30 former members of Character.AI’s research team (out of roughly 130 employees) to work on Google Deep Mind’s Gemini model.
- Character.AI will continue to develop chatbots. However, it will stop developing its own models and use open source offerings such as Meta’s Llama 3.1.
- Investors in Character.AI will receive $88 per share, roughly two and a half times the share price when the company’s last funding round established its valuation at $1 billion.
Behind the news: At Google, Shazeer co-authored “Attention Is All You Need,” the 2017 paper that introduced the transformer architecture. De Freitas led the Meena and LaMDA projects to develop conversational models. They left Google and founded Character.AI in late 2021 to build a competitor to OpenAI that would develop “personalized superintelligence.” The company had raised $193 million before its deal with Google.
Why it matters: Developing cutting-edge foundation models is enormously expensive, and few companies can acquire sufficient funds to keep it up. This dynamic is leading essential team members at high-flying startups to move to AI giants. The established companies need the startups’ entrepreneurial mindset, and the startups need to retool their businesses for a changing market.
We’re thinking: Models with open weights now compete with proprietary models for the state of the art. This is a sea change for startups, opening the playing field to teams that want to build applications on top of foundation models. Be forewarned, though: New proprietary models such as the forthcoming GPT-5 may change the state of play yet again.