June 14, 2024

Character.AI, a 16-month-old startup that creates online chatbots, said Thursday it raised $150 million in its latest funding round, valuing the company at $1 billion.

Character.AI is one of a small group of smaller companies — along with giants of the tech industry — that are building technology that could one day rival the systems being developed by OpenAI, a San Francisco startup whose launch sparked ChatGPT, an online chat robot that sparked an artificial intelligence boom.

These companies have an unusual mix of seasoned researchers and big ambitions, and they require a lot of money. Many experts believe that a small number of companies can dominate the work on new artificial intelligence.

“One of the concerns I have is that it’s going to be a winner-takes-all or winner-takes-all market—a few big companies will really dominate,” said Erik Brynjolfsson, a professor of economics and a senior fellow at Stanford University in the School’s People-Centered Institute. Institute of Artificial Intelligence.

While the rest of the tech industry is struggling with layoffs, plunging valuations and an unexpected banking crisis sparked by the collapse of a Silicon Valley bank, venture capitalists are racing to invest in young artificial intelligence companies.

Like OpenAI, new AI companies are building large language models, or LLMs, a type of AI that learns language skills by analyzing vast amounts of data from the internet. The technology powers online chatbots such as ChatGPT and can power a variety of other applications, including search engines, email services and personal tutors.

LL.M.s can answer questions, summarize essays, write term papers and even generate computer programs, but only a handful of companies are poised to build systems as powerful as OpenAI’s recently released system.

Palo Alto, California-based Character.AI.’s new funding round was led by Andreessen Horowitz, one of Silicon Valley’s most prominent venture capital firms. In December 2021, the company raised $43 million in seed funding.

While at Google, a team led by Character.AI founders Noam Shazeer and Daniel De Freitas developed a technology called LaMDA, short for Language Model for Conversational Applications. The chatbot project gained attention last summer when a Google engineer, Blake Lemoine, told The Washington Post that he believed LaMDA was sentient.

By then, Mr. Shazeer and Mr. De Freitas had left Google to start Character.AI. The company built technology similar to LaMDA, offering a website where people could chat with a reasonable fax of almost anyone, living or dead, real or imagined. Sarah Wang, general partner at Andreessen Horowitz, said the underlying technology could power many applications beyond chatbots.

This technique requires a lot of computer processing power. Mike Volpi, general partner at Index Ventures, which has invested in a Character.AI-like company called Cohere, estimates that these companies need at least $500 million to buy raw computer power.

OpenAI has raised billions of dollars from Microsoft. Most of the funds were used to purchase computing power from Microsoft’s Azure cloud computing service.

Mr. Shazeer said in an interview that Character.AI will soon raise additional funding from one or more “strategic partners.” That could mean taking investments from cloud computing companies and using that money to buy computing power from those companies.

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