March 20, 2024

Playing chess vs. checkers

Hi there, 

AI startup valuations have surged amid a flood of capital to the generative AI space.
 
Some of the hottest genAI startups have valuations more than 100x their forward-looking revenue per CB Insights data.

While these are big multiples, VCs are betting on the growth potential of these companies in the white-hot market. 

Glean, for example, reported annualized revenue of $39M in January, up nearly 4x from a year earlier. It was valued at $2.2B in February.

But the pressure is on to build sustainable businesses amid growing competition. 

Below, we look at the crowded large language model (LLM) developer space, with a focus on the implications of Microsoft’s recent deal with Inflection. 

What goes up…

As LLM developers burn through cash given compute costs, as we predicted last year, the focus is shifting to customer adoption and revenue. 

Private LLM leaders Anthropic ($16.1B valuation) and OpenAI ($80B valuation) have grown revenue rapidly in the last year by selling subscriptions to their chatbots and access to their models. 

They have more restrained multiples (20.5x and 18.1x, respectively based on 2023 data) than other genAI companies highlighted above. 

For example, Cohere reported $22M in annualized revenue last month (up from $13M in December). It's looking to fundraise at a $5B valuation — which would be a 227x multiple.

As the race to monetize intensifies, companies even in the white-hot genAI LLM space may have to start showing investors data vs. just selling a dream.

The bombshell: Inflection AI

Last week, Satya Nadella and Microsoft essentially acqui-hired Mustafa Suleyman and members of the Inflection AI team (valued at $4B) after the company struggled to commercialize its consumer chatbot. 

Suleyman co-founded Google-owned DeepMind and was also the co-founder of Inflection. 

Microsoft agreed to pay Inflection roughly $650M to license its models per The Information. This also includes $30M for Inflection to release Microsoft from any legal claims for the talent poaching.

The deal will make early investors whole (pictured below). 

Microsoft (and all of big tech) face incredible regulatory scrutiny for M&A and so hiring away talent without actually buying the company avoids that whole kerfuffle. This obviously only works when talent is what you want, and not the underlying business.

But honestly, it’s a killer strategy and highlights how Satya and the Microsoft team are really playing chess right now. It’s a bet everyone in big tech is looking at (although not sure all have the cachet of MSFT right now). 

More broadly, the deal and Inflection’s pivot is a reminder that not all will be winners even with an A-list engineering team and investors. 

The bottom line

Things are moving fast, as this Hugging Face customer describes.

I love you. 

Anand 

@asanwal 

P.S. Want to generate detailed company scouting reports in seconds for your diligence, exec communication, and proposal efforts? See what CB Insights’ new AI capabilities can do for you here. 

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