Musk’s xAI Has Considered Buying Character.AI
XAI has considered an acquisition of chatbot maker Character as Elon Musk’s AI startup hunts for talent and more ways to test its AI models.
The Takeaway
• Leaders of Musk’s xAI have considered buying Character AI
• xAI would get AI researchers and more ways to test its models
• More AI startups are likely to consider sales as competition, costs rise
XAI, Elon Musk’s one-year-old artificial intelligence startup, has considered acquiring chatbot maker Character.AI as it looks for more ways to test its Grok AI models, according to a person who spoke with xAI leadership about the deal.
The discussion may not result in a deal. But the internal debate at xAI points to the types of pairings that are likely to become more common as smaller AI startups such as Character face the steep costs of training and running their models while competing against deep-pocketed rivals.
Other conversational AI startups such as Adept and Inflection have effectively sold themselves to Amazon and Microsoft, respectively, despite having raised considerable capital in the past two years.
XAI has raised more than $6 billion and Musk has told investors he intends to raise more money in the future. Musk plans to use much of that money to expand xAI’s compute capacity, but he could look at consumer AI startups other than Character for potential acquisitions, the individual who spoke to xAI leaders said.
A spokesperson for Character declined to comment. Musk did not respond to email requests for comment. After this article was initially published, Musk posted on X, formerly Twitter, that “xAI is not considering an acquisition of Character AI.”
Character, which was privately valued at $1 billion in a March 2023 financing, runs an app that lets individuals message AI versions of anime characters, TV personalities and historical figures in hyperrealistic role-play. It makes money from a subscription plan that costs $9.99 per month.
It has raised more than $150 million from investors including Andreessen Horowitz and Greycroft. Google, which also provides Character with cloud computing services and access to Google’s advanced chips, has provided additional financing via a convertible note, The Information previously reported.
XAI leaders considered an acquisition after Character discussed a possible research partnership with xAI, as well as with Meta Platforms and Google. Such deals, earlier reported by The Information, could allow the chatbot maker to access the partnering company’s computing resources in exchange for sharing some of Character’s intellectual property.
Character’s leaders said in July that no partnership or acquisition deal was happening with Meta, according to a Character employee. Meta declined to comment.
With an acquisition of Character, xAI would gain technical talent in the form of dozens of AI researchers, a number of whom hail from Meta and Google. Musk in July said xAI was “definitely looking to increase our human talent advantage, so please apply at xAI.”
XAI could also use Character’s chatbots to get feedback on and improve its Grok models, adding to the data it collects through Musk’s X, formerly known as Twitter. Rivals including Meta are improving their models using interactions from their consumer apps, such as WhatsApp.
Character has engaged in partnership discussions as more tech companies have developed competing products, though these offerings have had varying degrees of success. Meta scrapped chatbots modeled after celebrities such as Tom Brady after less than a year, The Information reported. The company has since introduced a feature that allows creators and others to make customized chatbots.
Google has also been developing a product for creating and conversing with customizable chatbots, which could launch as soon as this year.
An offer from xAI, should one materialize, would end months of uncertainty over Character’s next steps. Although it isn’t at risk of running out of cash soon, it hasn’t raised a new round of venture funding in more than a year, a contrast with the rapid funding pace of many AI startups.
Character in recent weeks has sought to cut costs and has instituted new processes for approving budgets and head counts, according to an employee. It generates revenue through its premium plan, which has fewer than 100,000 subscribers—a small fraction of its more than 6 million daily active users in July, that person said.
Two former Google researchers—Noam Shazeer, now Character’s CEO, and Daniel De Freitas, its president—founded Character in November 2021. Shazeer, one of the authors of a foundational generative AI research paper, and De Freitas left Google in part due to frustration with the company’s bureaucracy.