Big AI thins out the competition as startups quit the race to build large language models
Hello and welcome to Eye on AI! In this edition…Big tech increasingly squeezes startups out of the generative AI market; an AI-discovered cancer drug begins clinical trials; another OpenAI cofounder joins Anthropic; and spend on LLMs booms (though still only represents a fraction of the AI model market).
The market for large language models lost another contender yesterday, while at the same time, its leader—OpenAI—closed a massive $6.6 billion funding round that represents the largest VC raise in history and will give it practically unrivaled resources to compete.
AI startup Character.AI said it’s abandoning its efforts to build LLMs because it’s gotten “insanely expensive” to compete with the big guys, mainly Google and Microsoft-backed OpenAI. Dominic Perella, the company’s new interim chief executive, told the Financial Times that training frontier models has become “difficult to finance on even a very large start-up budget.”
The market for generative AI models is barely two years old, and yet big tech has already eliminated much of the competition.
A new kind of acquisition thins out the model market
Character.AI secured $150 million in funding at a $1 billion valuation last year, but the respectable funding is only a dent in what’s needed to build expensive and resource-intensive models—let alone compete with companies like Google and OpenAI. This isn’t the only reason Character.AI is where it is today, however. The company is the latest AI startup to be kinda-sorta acquired by Big Tech.
In August, Character.AI and Google struck a deal in which cofounders Noam Shazeer and Daniel De Freitas rejoined Google (where they worked until 2021), as well as around 30 of the startup’s researchers. Character.AI still stands but said it will use external models and focus on developing its consumer chatbots that simulate conversations with celebrities and characters.
The structure of the deal mirrors the ones Microsoft made with Inflection and Amazon struck with both Adept and Covariant earlier this year. Critics have blasted these types of deals as a way for Big Tech to skirt antitrust scrutiny that could block a full acquisition deal. While Covariant will continue developing models for various customers, it’s still linked up with a tech giant in a big way. In other cases, like with Adept, what’s left of the startup is also ceasing to develop models (its deal with Amazon is now under FTC scrutiny). Overall, the result is a much thinner competitive market for model development and boosts for the largest players in the game.
Who can make a model?
At the same time Character.AI became the latest startup to throw in the towel on making AI models, OpenAI announced it had secured unprecedented funds while Nvidia released a new massive open-source model it says rivals OpenAI’s GPT-4o. Nvidia, of course, is among the few other big tech players with the resources to truly compete—thanks to the piles of money it makes selling the chips used for AI models. The timing of it all underscores who can compete in the LLM market and who barely stands a chance.
As if OpenAI scoring the largest funding round in history (with an eye-popping $157 billion valuation) isn’t enough, the company is going a step further to make it more difficult for its competitors to raise funds. According to the Financial Times, CEO Sam Altman asked investors to not back rivals like Anthropic or Elon Musk’s xAI.
In January, I published an issue of Eye on AI that asked “Where did all the models go?” It discussed how enterprises aren’t making their own AI models anymore because it’s so resource-intensive to do so, and because plugging into a model developer’s API is so much easier. For customers, it’s a reasonable and strategic approach. But when it doesn’t even make sense for the startups that just recently poured millions of dollars and expert hours into developing models to continue doing so, well that says a whole lot about the state of competition in this market.
Now, here’s more AI news.
Sage Lazzaro
sage.lazzaro@consultant.fortune.com
sagelazzaro.com
This story was originally featured on Fortune.com