After an unconventional move that saw Inflection co-founders Mustafa Suleyman and Karen Simonyan, along with top employees leave the company to join Microsoft, new details are emerging about the deal. According to The Information, Microsoft has agreed to pay approximately $650 million to Inflection AI. The arrangement, which Microsoft insists is not an acquisition, has sparked discussions about the concentration of AI power and potential antitrust implications.
According to sources involved in the transaction, the majority of the $650 million will come in the form of a licensing deal that makes Inflection's models available for sale on Microsoft's Azure cloud service. The startup plans to use the licensing fee to provide its investors with a modest return on their capital, an unusual step for a company that hasn't been acquired or liquidated.
The mass exodus of staff will leave Inflection, which has raised $1.5 billion in less than two years to develop its chatbot, Pi, with few of the AI researchers that made it valuable. The company is now repositioning itself as an "AI Studio" to help other businesses train and fine-tune their AI models, and has appointed former Mozilla executive Sean White as CEO.
The deal structure has raised questions about whether Microsoft designed it to avoid lengthy antitrust reviews, as U.S. officials have expressed concern about the concentration of AI power among a few large technology giants. A Microsoft spokesperson declined to comment on these questions.
To soften the blow for its investors, Inflection has promised to pay them more than the value of their original investment while allowing them to retain equity in the startup. Investors in the company's first major round of funding will receive one and a half times their investment, while those in a subsequent $1.3 billion funding round last year will receive 1.1 times their investment, according to a person involved in the deal.
In addition to the 620 million licensing fee, Microsoft has agreed to pay Inflection about 30 million to waive any legal rights related to poaching its employees and has renegotiated a $140 million line of credit that aimed to help Inflection finance its operations and pay for Microsoft services.
The licensing deal gives Microsoft the rights to reuse Inflection's intellectual property and sell it on Azure, similar to its arrangement with OpenAI. However, unlike the exclusive rights Microsoft has to reuse OpenAI's models, the deal with Inflection is non-exclusive, meaning the startup can theoretically sell its IP to other cloud providers.
The details of the Inflection deal provide a window into the complicated partnerships between major cloud service providers and AI startups, which have massive computing needed for their large language models. Microsoft, Google, and Amazon have poured billions of dollars into AI startups such as OpenAI and Anthropic, with the startups paying the cloud companies for compute services and sometimes benefiting from revenue sharing agreements.
Venky Ganesan, a managing director at Menlo Ventures, which recently led an investment in Anthropic, said, "This is the new way the Magnificent Seven [tech stocks] are going to do acquisitions, you get the [intellectual property] and team without FTC scrutiny or approval."
many people are getting this deal wrong. this is the new way the magnificent 7 are going to do acquisitions. you get the IP and team without FTC scrutiny or approval. another brilliant move by @satyanadella and @Microsoft https://t.co/8EQXF2KNiv
— Venky Ganesan (@venkyganesan) March 19, 2024
Given the massive gap between Inflection's technology and that of OpenAI, some investors have described Microsoft's payout to Inflection as generous. Nathan Benaich, founder of venture firm Air Street Capital, questioned the need for Microsoft to acquire a license to Inflection's models when it already has access to OpenAI's state-of-the-art models.
The arrangements also highlight the complex relationships between startups, investors, and big tech companies. For example, Reid Hoffman, co-founder of Inflection AI, is an investor at Greylock, which incubated and invested in Inflection AI, and has been a Microsoft board member since 2017. Hoffman recused himself from the Microsoft board discussions and votes related to the Inflection deal, as well as from the Inflection board's vote on the matter.
After the deal was announced, Hoffman said publicly that the Microsoft agreement “means that all of Inflection’s investors will have a good outcome today, and I anticipate good future upside.”