Analyzing Google’s Character.ai Acquisition

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According to a recent report, the global generative AI market is expected to grow 34% annually over the next few years to reach $255.8 billion by 2033 from $13.5 billion in 2023. It is no surprise then that companies big and small are all reaching out to expand their presence in the industry.

Character.ai’s Offerings

Menlo Park-based Character.ai was set up in 2022 by former Google engineers and AI experts Noam Shazeer and Daniel De Freitas. When the company was founded, it was focused on building large language models (LLMs) to deliver automated conversation through chatbots. Since then, though, the market has changed significantly as there are many pretrained models readily available. By using these open models, Character.ai focuses on fine-tuning and development of its “characters”. It is a full-stack AI company that lets users personalize their AI experience by interacting with AI “Characters” that are chatbots mimicing famous personalities from history, fiction, and popular culture. ?

Character.ai has been publicly available since September 2022, and it released an app in May 2023. Its product allows users to chat with characters, living, dead or fictional – some who have been created by themselves. It already has 18 million chatbots available that are accessed by over 20 million registered users. These chatbots are helpful with performing activities such as creative writing, learning a language or planning a trip. It also offers text-based games or book and music recommendation bots as it wanted to establish the possibility of chatbot entertainment. According to their reports, users spend an average of 29 minutes per visit with the chatbots.

Character.ai’s Financials

Character.ai operates on a freemium model. Users can pay a monthly fee to get faster responses from the bots, earlier access to new functions and guaranteed access when workloads are high. Character.ai expects to generate $16.7 million in revenues this year. But heavy investment in the technology still means that it will continue to incur losses.

Till very recently, Character.ai was privately held. It had raised $193 million in funding so far. It raised $150 million in 2023 at a valuation of $1 billion . Recently, Google announced plans to acquire Character.ai for an estimated $2.7 billion. With the Google deal, Character.ai bought out its investors and distributed the ownership among employees in a co-operative. This structure saw Character.ai lose 20% of staff to Google’s AI arm DeepMind. The deal also gave Google a one-off license to the startup’s models . As part of the deal, Character.ai moved away from building out the language model and will now pivot exclusively to post-training by using open-source models developed by others such as Meta’s Llama. Interestingly, there were reports that Facebook itself had placed an unsuccessful bid to buy Character.ai earlier. Character.ai will also provide Google with a non-exclusive license for its current LLM technology.

Character.ai is not the only company to go through this pivot. Germany’s Aleph Alpha, gave up building LLMs, to follow a similar approach . There is also a huge rise of acquihire within the AI space. In March this year, Microsoft acquired the team from Inflection for $650 million. Amazon also entered into a similar deal for executives at Adept.

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Image by Pete Linforth from Pixabay