Yet another buzzy AI startup has been taken off the playing field.

This time, Google has hired back the AI leadership of Character.AI, including co-founders Noam Shazeer and Daniel De Freitas. Both men famously left Google to start Character in 2021 because, as Shazeer has said publicly, they were frustrated by the search giant’s bureaucracy. A few years later, they are returning to work in Google DeepMind, along with their research team of about 30 people. Character.AI’s roughly 140 remaining employees are being left behind to figure out what’s next.

The surprise “agreement” with Google is a strange one on multiple levels. For one, while no company shares are technically changing hands, investors in Character.AI are being paid for the value of their equity by Google at a valuation of $2.5 billion. Sources also tell me that employees are receiving cash at that valuation commensurate with their vested shares, and they’ll keep getting payments at that price as their existing stock grants continue to vest. (Character.AI raised about $150 million to date and its last known valuation was $1 billion.)

All signs point to this deal coming together rather quickly. In a memo shared with Google DeepMind employees on Friday that I saw, CEO Demis Hassabis said there would be “more details to come on how Noam and his team will integrate” into the org to “help us continue to accelerate our progress on Gemini.” More perplexingly, I know that Shazeer and his team were interviewing to fill senior leadership roles, including a CPO and COO, as recently as last week. 

“I am super excited to return to Google and work as part of the Google DeepMind team,” Shazeer said in a statement shared through a Google spokesperson. “I am so proud of everything we built at Character.AI over the last 3 years. I am confident that the funds from the non-exclusive Google licensing agreement together with the incredible Character.AI team positions Character.AI for continued success in the future.”

While Character.AI hasn’t received anywhere near as much media attention as names like OpenAI and Anthropic, its one of the most successful consumer AI startups to date. The custom chatbot platform it operates has millions of users, many of whom have seemingly developed relationships with its bots. These bots collectively handle about 20 percent of Google Search’s query volume, which is a staggering statistic.

Shazeer is widely considered to be one of the leading AI researchers in the world, having joined Google in 2000 and co-authored the seminal “Attention is All You Need” research paper in 2017 that kicked off the generative AI boom. Despite Character.AI’s early success, people who know him tell me he is solely driven to create AGI and has never had a real interest in building a consumer business. 

That may be why Character.AI has been considering its options lately. The company has been talking to investors for a while about raising a massive round of funding, though those talks have continued to stall for months. In parallel, there have also been informal talks with potential acquirers, including Mark Zuckerberg and Elon Musk. (Company spokespeople declined to comment on the details in this story, some of which were earlier reported by TechCrunch and The Information.)

At the same time, the AI landscape has changed drastically around Character.AI. The rise of open source models have made it increasingly less economical for a startup in its position to continue investing in training closed, frontier models. Character.AI was making money from its subscription offering but nowhere near enough to cover its costs. I’m told that significant portions of the company have been essentially run by the staff of its main investor, Andreessen Horowitz.

As I’ve written about, the industry’s focus is also shifting from the models themselves to making products out of generative AI that people can use and interact with. Just this week, Zuckerberg came directly for Character.AI by letting people make their own chatbots in Instagram. It’s really difficult to survive as a young, unprofitable company when Meta replicates a format you invented at scale — just ask Snap. 

Everything about this deal with Google is being telegraphed as not an acquisition. Google likely knows that trying to fully acquire Character.AI would trigger a painful, protracted antitrust review that could end in the deal being blocked. Instead, it’s replicating the playbook of Microsoft’s hiring-and-licensing of Inflection, or Amazon’s more recent hiring-and-licensing of Adept.

In this case, Character.AI’s general counsel, Dom Perella, will be interim CEO while there’s a hunt for a permanent one. Google is paying for a “non-exclusive license” to use the foundational models that power its chatbots, though it hasn’t said what they will be used for (I’m going to guess nothing).

While this setup may be positioned by Character.AI as “our next phase of growth,” everyone I’ve talked to unfortunately agrees that, without the co-founders and their researchers, the company’s days are probably numbered. 

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• Augment’s report on the top 20 most actively traded private tech companies.
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• “Pump and Trump:” Inside the MAGA-fueled fever dream of the 2024 Bitcoin Conference.
• How the Jeff Bezos era of management style is fading inside Amazon.
• The Wall Street Journal’s incredible story on the rescue of Evan Gershkovich.

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