Google previously spent 2.7 billion US dollars to poach two founders and 20% of the employees of the AI startup Character.ai. According to media reports, with the talent drain and the immense competition pressure from technology giants, Character.ai has given up on developing large AI models and is now trying to recover 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 largely abandoned competing with better-funded rivals like OpenAI, Amazon, and Google in large language models. Instead, they are focusing on the company's popular consumer products, including chatbots simulating conversations with various characters and celebrities.

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

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

Smaller companies are finding it increasingly challenging to compete against tech giants.

The transition path of Character.ai is not unique; Germany's Aleph Alpha had also given up on building 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 institutions paying more attention to transactions like Microsoft's 13 billion dollar collaboration with OpenAI.

For example, microsoft reached a $650 million trade agreement with Inflection CEO Mustafa Suleyman and other employees in March, attracting the attention of the United Kingdom's competition regulator, who investigated it as a "merger case", but the investigation was later halted. Amazon's so-called "acqui-hire" of Adept executives also triggered a review by the US Federal Trade Commission (FTC).

In August of this year, google hired 20% of Character.ai's employees to join its AI department DeepMind, paying $2.7 billion for exclusive rights to the startup's then model, without access to future technology, according to insiders 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 left because google refused to release their AI-driven chatbot development and now their departure.

Analyst Jamie MacEwan of Enders Analysis stated:

"Character.ai's concern is that what they do can easily be copied by wealthy and globally dominant technology companies, and those star founders are their biggest selling point in the industry. Without them, Character.ai may struggle to maintain a technological advantage."

Interim CEO: Confident in maintaining growth

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

Pereira is optimistic that the google deal will not raise antitrust issues, stating plans to continue operating in the same market."We will continue our AI research," he said. "We still have all of our technology, almost all of our personnel are still here, and we're still growing."

With the 2.7 billion dollars obtained through the trade with Google, Character.ai bought back investors' shares and allocated ownership of the company to employees, forming a "very unique structure, perhaps unheard of in Silicon Valley," Pereira said. According to insiders, the interim CEO's shareholding is less than 10%, and employees also received a one-time payment.

This trade also allowed the startup to have enough funds to operate for 18 months, Pereira said. The company may seek funding from venture capital institutions in the future and reach 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 reached a consensus around the mission of creating the next big platform, using AI to support this platform, and leveraging our proprietary technology to drive it," he added.