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AI startups face tough financial reality test| GuyWhoKnowsThings

Call it the end of the beginning of the AI ​​boom.

Since mid-March, financial pressure on several AI startups has taken its toll. Inflection AI, which raised $1.5 billion but made almost no money, closed its original business. Stability AI has laid off employees and parted ways with its CEO. And Anthropic has scrambled to close the roughly $1.8 billion gap between its modest sales and huge expenses.

The AI ​​revolution, it is increasingly clear in Silicon Valley, will come at a very high price. And technology companies that have staked their futures on it are struggling to figure out how to close the gap between those expenses and the profits they hope to eventually make.

This problem is particularly acute for a group of high-profile startups that have raised dozens of billions of dollars for the development of generative AI, the technology behind chatbots like ChatGPT. Some of them are already realizing that competing head-on with giants like Google, Microsoft and Meta will require billions of dollars, and even that may not be enough.

“You can already see the writing on the wall,” said Ali Ghodsi, CEO of Databricks, a data warehouse and analytics company that works with artificial intelligence startups. “No matter how good what you do is, is it commercially viable?”

While a lot of money has been burned in other tech booms, the expense of building AI systems has shocked tech industry veterans. Unlike the iPhone, which began the latest technological transition and costs a few hundred million Because it relied heavily on existing components, it cost billions to develop, but billions of dollars to create and maintain. The latest generation chips they need are expensive and scarce. And each query to an AI system costs much more than a simple Google search.

Investors have poured $330 billion into about 26,000 AI and machine learning startups over the past three years, according to PitchBook, which tracks the industry. That's two-thirds more than the amount they spent funding 20,350 AI companies between 2018 and 2020.

The challenges faced by many AI startups contrast with the early commercial results of OpenAI, which is backed by $13 billion from Microsoft. The attention it has generated with its ChatGPT system has allowed the company to build a business by charging $20 a month for its premium chatbot and has offered a way for companies to develop their artificial intelligence services with the technology that powers its chatbot, which It's called big language. model. OpenAI made about $1.6 billion in revenue over the past year, but it's unclear how much the company is spending, two people familiar with the company's business said.

OpenAI did not respond to requests for comment.

But even OpenAI has had challenges scaling sales. Companies fear that artificial intelligence systems could generate inaccurate responses. The technology has also been troubled by questions about whether the data supporting the models infringed copyright.

(The New York Times defendant OpenAI and Microsoft in December for copyright infringement of news content related to AI systems).

Many investors point to Microsoft's rapid sales growth as evidence of AI's business potential. In its most recent quarter, Microsoft reported about $1 billion in sales of AI services in cloud computing, up from virtually nothing a year ago, said Brad Reback, an analyst at investment bank Stifel.

Meta, on the other hand, doesn't expect to make money for years from its AI products, even if increases its infrastructure spending by up to $10 billion only this year. “We're investing to stay ahead of this,” Meta CEO Mark Zuckerberg said during a call with analysts last week. “And we're doing it at the moment we're also scaling the product before it makes money.”

AI startups have been challenged by that gap between spending and sales. Anthropo, who has raised more than 7 billion dollars with the backing of Amazon and GoogleIt is spending about $2 billion a year but bringing in only $150 million to $200 million in revenue, said two people familiar with the company's finances, who requested anonymity because the figures are private.

Like OpenAI, Anthropic has turned to partnerships with large, established tech companies. Its CEO, Dario Amodei, has been courting Wall Street clients and recently announced that he was working with Accenturethe global consulting company, to create custom chatbots and artificial intelligence systems for companies and government organizations.

Anthropic spokeswoman Sally Aldous said thousands of businesses were using the company's technology and millions of consumers were using its publicly available chatbot, Claude.

Stability AI, which generates images, announced last month that its founding CEO, Emad Mostaque, had give upjust a week after the resignation of three researchers who were part of the five-person team that built the company's original technology.

It was on track to generate about $60 million in sales this year against about $96 million in costs for its imaging system, which has been available to customers since 2022, a person familiar with its business said. .

Stability AI's financial position appears better than that of language model makers like Anthropic because developing imaging systems is less expensive, AI investors said. But there is also less demand to pay for images, so sales prospects are more uncertain.

Stability AI has been operating without the support of a tech giant. After raise $101 million from venture capitalists in 2022, needed more funding last fall, but was struggling to show investors that it could sell its technology to companies, said two former employees, who declined to speak publicly because they were not authorized to do so. He raised $50 million from Intel late last year but still faced financial pressure, they said.

As the new company grew, its sales strategy changed, these people said. At the same time, it was spending millions a month on IT costs. Some investors pressured Mostaque to resign, according to one investor, who declined to speak publicly about a personnel issue. This month, after he resigned, Stability AI made layoffs and restructured its business to put the company on “a more sustainable path,” according to a company memo reviewed by The New York Times.

Stability AI declined to comment. Mostaque refused to discuss his departure.

Inflection AI, a chatbot startup founded by three AI veterans, had raised $1.5 billion from some of the biggest names in tech. But a year after introducing its artificial intelligence personal assistant, it had almost no revenue, according to one investor. The Times reviewed a letter Inflection had sent to investors saying that the additional fundraising “was not the best use of our investors' money, especially in the context of the current frothy AI market.”

At the end of March, closed its original business and largely disappeared at Microsoft, the world's most valuable public company.

Microsoft also helped fund Inflection AI, whose CEO Mustafa Suleyman rose to prominence as one of the founders of DeepMind, a seminal artificial intelligence lab that Google acquired in 2014. Suleyman founded Inflection AI alongside Karén Simonyan, a researcher DeepMind key. and Reid Hoffman, a prominent Silicon Valley venture capitalist who helped found OpenAI and serves on Microsoft's board of directors.

Microsoft and Inflection AI declined to comment.

The company had talented AI researchers who had worked at places like Google and OpenAI.

But almost a year after launching its AI personal assistant, Inflection AI's revenue was, in the words of one investor, “de minimis.” Essentially nothing at all. It couldn't continue to improve its technologies and keep pace with chatbots from companies like Google and OpenAI unless it continued to raise huge sums of money.

Now Microsoft is swallowing most of its staff, including Suleyman and Simonyan.

This is costing Microsoft more than $650 million. But unlike Inflection AI, you can afford to play the long game. It has announced plans for its staff to build an artificial intelligence lab in London, working on the kind of systems startups hope to succeed.

Erin Griffith contributed with reports.

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