Monday, May 20

Inside the frenzy of funding for Anthropic, one of the most interesting start-ups in artificial intelligence

Last May, Anthropic, one of the world’s largest AI startups, raised $450 million from investors including Google and Salesforce. It was the beginning of an astonishing wave of funding.

In August, Anthropic had secured $100 million from two Asian telecom companies. Amazon subsequently allocated $4 billion, followed by another $2 billion from Google.

This month, venture capital firm Menlo Ventures closed a deal to invest $750 million in Anthropic.

Overall, the AI-based startup grossed $7.3 billion in one year. Its five financing deals stood out not only for their speed and size, but also for their unusual structures.

In one such deal, Anthropic agreed to use technologies such as chips and cloud computing services from companies that invested in it. This meant, in effect, that some of the money raised would be pumped back into its investors. And to consolidate smaller investors interested in Anthropic, Menlo created a legal entity known as a “special purpose vehicle.”

“These deals are so complicated,” said Dave Brown, a vice president of Amazon Web Services involved in Amazon’s deal with Anthropic.

Despite AI’s promise to transform every aspect of society, it began by subverting the startup arrangements of Silicon Valley. Young companies typically raise money every 15 months or so, after demonstrating that their businesses have grown. But since generative AI – which can generate text, images, sound and video – hit the scene in late 2022, the playbook has been thrown out as investors have fought for a share of the hottest developers .

Few companies illustrate this shift better than Anthropic, which makes a chatbot called Claude and sells various forms of its AI technology. In the last year the start-up’s valuation has tripled at $15 billion, three people familiar with his finances said. It reached about $8 million in monthly revenue last year and is expected to grow about eightfold this year, two of the people said.

Other AI startups, including OpenAI, Character.AI and Cohere, have struck similar investment deals in a race to raise the most money, form the most profitable partnerships, hire the best talent and gain access to the most number of computer chips. OpenAI recently closed a deal valuing it at $80 billion or more.

Investors can’t afford to miss the stock because “if you don’t find the winner in the space, you’re out of the game,” said Ilya Strebulaev, a finance professor at Stanford.

Some investments in AI startups by tech giants have recently attracted the attention of regulators. Last month, the Federal Trade Commission said it had opened an investigation into Amazon and Google’s investments in Anthropic for potential antitrust violations.

A spokesperson for Anthropic said it plans to cooperate with the FTC. The company declined to comment further. Anthropic’s financing by Menlo Ventures was previously reported by The Information.

Since founding Anthropic in 2021, Dario Amodei, CEO, and his sister, Daniela Amodei, president, have positioned it as a start-up that would build AI with guardrails. In a podcast interview last year, Dario Amodei said there is a 10 to 25 percent chance that artificial intelligence technology could destroy humanity.

But if that doesn’t happen, he said, “it’s not just going to be good, it’s going to be really, really great.”

From the beginning, Anthropic’s financing has been unconventional. In 2021, it raised $124 million from investors including Jaan Tallinn, an entrepreneur known for focusing on the existential risks of technology, as well as the Center for Emerging Risk Research, a Swiss nonprofit that aims to “build a driven future by wisdom and compassion.” for all sentient beings.” (The group changed its name to Polaris Ventures.)

In 2022, Anthropic raised $580 million for research into creating powerful AI technologies and ensuring they cause no harm. Most of that sum – which dwarfs what venture capitalists had invested in other AI startups – came from Sam Bankman-Fried, the founder of cryptocurrency exchange FTX, and his colleagues. They belonged to a community known as effective altruists, which has long viewed artificial intelligence as an existential risk.

When FTX filed for bankruptcy in November 2022 and control of its assets was handed over to new management, The Anthropic was left with an uncertain future. Its prospects reversed days later when OpenAI released the AI-powered chatbot ChatGPT. The technology behind ChatGPT was developed largely by Dario Amodei and others who had worked at OpenAI before leaving to create Anthropic.

This brought attention to Anthropic, and Google made its first investment. Anthropic also agreed to purchase computing power through Google’s cloud computing service, which it uses to train and service its technologies.

In September, Amazon signed a similar deal with Anthropic, investing up to $4 billion. Anthropic’s Claude chatbot has been the most popular artificial intelligence service offered on Amazon’s cloud computing system, Amazon Web Services, a person with knowledge of the matter said.

As part of the deal, Anthropic agreed to build its own artificial intelligence using specialized computer chips designed by Amazon. If Anthropic succeeds, Amazon’s shares in the start-up could pay off handsomely. Meanwhile, the cloud computing deal will boost Amazon’s profits.

The deal was structured as convertible notes, or debt that becomes equity when Anthropic reaches certain milestones, two people familiar with the structure said.

Amazon’s funding of Anthropic mirrors the way OpenAI has raised money. In 2019, OpenAI raised $1 billion from Microsoft and spent most of the money purchasing computing power through Microsoft’s Azure cloud service. Microsoft has since invested another $12 billion in the company, and OpenAI has spent most of the money on Microsoft’s cloud services.

(The Times is suing OpenAI and Microsoft, alleging copyright infringement.)

Some investors have done so questioned such deals because companies like Google and Amazon are investing money that ends up bolstering their own revenue. The companies said the agreements were kosher.

Google’s investment in Anthropic is separate from the start-up’s agreement to use its cloud services, said Daniel Gabis, a Google spokesman. They have “always been separated,” he said.

Amazon properly accounts for all revenue and expenses, said Casey McGee, an Amazon spokeswoman. “To suggest otherwise, or that AWS’s deal with Anthropic is anything but a normal business deal, is completely false,” she said.

Even after raising billions from Amazon and Google, Anthropic knew it would eventually need more money. Generative AI startups are constantly updating, refining, and expanding their technology to make their product accurate, up-to-date, and more powerful, and this requires huge amounts of expensive computing power.

Finding new investors was easy for Anthropic. But many of those interested wanted to invest $10 million to $25 million, while the company was aiming for a much larger sum.

In November, Neerav Kingsland, head of business development at Anthropic, spoke at a conference hosted by Menlo Ventures, which had previously invested. Menlo has proposed to lead Anthropic’s next funding round, with a twist: What if the company rolled all the small investors into a single special purpose vehicle?

The deal would save Anthropic time and streamline the process. Mr. Kingsland and Anthropic’s founders agreed, a person familiar with the talks said.

Anthropic told investors that $15 billion would be the lowest valuation it would accept, two people familiar with the situation said.

After raising the $750 million this month, Anthropic is no longer running a formal process to raise money, a person familiar with the situation said. But investors may soon have another opportunity.

As part of FTX’s bankruptcy proceedings this month, the cryptocurrency firm asked the U.S. Bankruptcy Court in Delaware for permission to sell its 8% stake in Anthropic. FTX’s lawyers said they sought to move quickly to sell the shares alongside Anthropic’s next funding rounds.

According to FTX “Anthropic will continue to seek additional rounds of equity financing,” the lawyers wrote.