Google poaches star founder and elite team for $2.7 billion, Character.ai abandons AI large model research and development

Google previously spent $2.7 billion to poach two founders and 20% of the employees of the AI startup Character.ai. According to media reports, due to talent loss and intense competition from tech giants, Character.ai has abandoned the development of large AI models and is now trying to revive the company by improving consumer products.

Dominic Perella, the new interim CEO of Character.ai, stated in an interview with the Financial Times that the company has essentially given up competing with better-funded rivals such as OpenAI, Amazon, and Google in the large language model space. Instead, they are focusing on popular consumer products, including chatbots that simulate conversations with various characters and celebrities.

"The cost of training cutting-edge models has become extremely high... It's very difficult for even a very large startup budget to bear."

"Our consumer products have gained amazing traction, leading to two completely different opinions within the company. Some want to focus on training cutting-edge models, while others from consumer backgrounds see the potential of this product taking off."

Small Companies Struggle Against Tech Giants' Competition

The shift in direction for Character.ai is not unique, as Germany's Aleph Alpha previously abandoned its ambition to build large language models due to high development costs.

Analysts believe that this situation has raised concerns about the dominance of big tech companies in the AI industry, with global regulatory bodies increasingly focusing on deals like Microsoft's $13 billion partnership with OpenAI.

For example, Microsoft's $650 million deal with Inflection CEO Mustafa Suleyman and other employees in March raised concerns from the UK Competition and Markets Authority, which investigated it as a "merger case" but later stopped the investigation. Amazon's alleged "acqui-hiring" of Adept executives also triggered a review by the US Federal Trade Commission (FTC).

In August this year, Google hired 20% of Character.ai's employees to join its AI division DeepMind, paying $2.7 billion for the exclusive license to the startup's then-model but without access to future technology, according to sources familiar with the matter who spoke to the media.

As part of the deal, Google rehired Character.ai's co-founders Noam Shazeer and Daniel De Freitas. The two are also Google veterans but had previously resigned because Google refused to release their AI-driven chatbot, leading to their departure.

Jamie MacEwan, an analyst at Enders Analysis, commented:

"The concern with Character.ai is that what they are doing can easily be replicated by big tech companies with financial resources and extensive global coverage, and those star founders are its biggest selling point in the industry. Without them, Character.ai may struggle to maintain a technological edge. **"

Interim CEO: Confident in Sustaining Growth

Character.ai had previously attracted acquisition interest from companies including Facebook and Meta, with the company's valuation reaching $1 billion in a financing round led by venture capital giant a16z last year.

Pereira is optimistic that the deal with Google will not raise antitrust issues, stating that they plan to continue operating in the same market. "We will continue our AI research," he said. "We still have all our technology, almost all of our staff are still here, and we are still growing."

With the $2.7 billion obtained through the deal with Google, Character.ai bought back shares from investors and allocated ownership of the company to employees, forming a "very unique structure, perhaps unheard of in Silicon Valley before," Pereira said. According to sources, the interim CEO holds less than 10% of the shares, and employees also received a one-time payment.

This deal also provided the startup with enough funds to operate for 18 months, Pereira stated, noting that the company may seek funding from venture capital firms in the future and enter into similar licensing agreements with other companies.

Character.ai currently has 20 million monthly active users, doubling year-on-year, with the main user group being young people aged 13 to 25, Pereira said. Its main source of revenue is subscriptions, but subscription users account for a very small percentage.

"In the past few weeks, we have rallied around the mission of creating the next big platform, using AI to support this platform, and leveraging our exclusive technology to drive it," he added