Investing 28-03-2024 13:02 11 Views

Amazon spends $2.75 billion on AI startup Anthropic in its largest venture investment yet

Amazon is making its largest outside investment in its three-decade history as it looks to gain an edge in the artificial intelligence race. 

The tech giant said it will spend another $2.75 billion backing Anthropic, a San Francisco-based startup that’s widely viewed as a front-runner in generative artificial intelligence. Its foundation model and chatbot Claude competes with OpenAI and ChatGPT.

The companies announced an initial $1.25 billion investment in September, and said at the time that Amazon would invest up to $4 billion. Wednesday’s news marks Amazon’s second tranche of that funding.

Amazon will maintain a minority stake in the company and won’t have an Anthropic board seat, the company said. The deal was struck at the AI startup’s last valuation, which was $18.4 billion, according to a source. 

Over the past year, Anthropic closed five different funding deals worth about $7.3 billion. The company’s product directly competes with OpenAI’s ChatGPT in both the enterprise and consumer worlds, and it was founded by ex-OpenAI research executives and employees.

News of the Amazon investment comes weeks after Anthropic debuted Claude 3, its newest suite of AI models that it says are its fastest and most powerful yet. The company said the most capable of its new models outperformed OpenAI’s GPT-4 and Google’s Gemini Ultra on industry benchmark tests, such as undergraduate level knowledge, graduate level reasoning and basic mathematics.

“Generative AI is poised to be the most transformational technology of our time, and we believe our strategic collaboration with Anthropic will further improve our customers’ experiences, and look forward to what’s next,” said Swami Sivasubramanian, vice president of data and AI at AWS cloud provider.

Amazon’s move is the latest in a spending blitz among cloud providers to stay ahead in the AI race. And it’s the second update in a week to Anthropic’s capital structure. Late Friday, bankruptcy filings showed crypto exchange FTX struck a deal with a group of buyers to sell the majority of its stake in Anthropic, confirming a CNBC report from last week.

The term generative AI entered the mainstream and business vernacular seemingly overnight, and the field has exploded over the past year, with a record $29.1 billion invested across nearly 700 deals in 2023, according to PitchBook. OpenAI’s ChatGPT first showcased the tech’s ability to produce human-like language and creative content in late 2022. Since then, OpenAI has said more than 92% of Fortune 500 companies have adopted the platform, spanning industries such as financial services, legal applications and education.

Cloud providers like Amazon Web Services don’t want to be caught flat-footed.

It’s a symbiotic relationship. As part of the agreement, Anthropic said it will use AWS as its primary cloud provider. It will also use Amazon chips to train, build and deploy its foundation models. Amazon has been designing its own chips that may eventually compete with Nvidia. 

Microsoft has been on its own spending spree with a high-profile investment in OpenAI. Microsoft’s OpenAI bet has reportedly jumped to $13 billion as the startup’s valuation has topped $29 billion. Microsoft’s Azure is also OpenAI’s exclusive provider for computing power, which means the startup’s success and new business flows back to Microsoft’s cloud servers.

Google, meanwhile, has also backed Anthropic, with its own deal for Google Cloud. It agreed to invest up to $2 billion in Anthropic, comprising a $500 million cash infusion, with another $1.5 billion to be invested over time. Salesforce is also a backer.

Anthropic’s new model suite, announced earlier this month, marks the first time the company has offered “multimodality,” or adding options like photo and video capabilities to generative AI.

But multimodality, and increasingly complex AI models, also lead to more potential risks. Google recently took its AI image generator, part of its Gemini chatbot, offline after users discovered historical inaccuracies and questionable responses, which circulated widely on social media.

Anthropic’s Claude 3 does not generate images. Instead, it only allows users to upload images and other documents for analysis.

“Of course no model is perfect, and I think that’s a very important thing to say upfront,” Anthropic co-founder Daniela Amodei told CNBC earlier this month. “We’ve tried very diligently to make these models the intersection of as capable and as safe as possible. Of course there are going to be places where the model still makes something up from time to time.”

Amazon’s biggest venture bet before Anthropic was electric vehicle maker Rivian, where it invested more than $1.3 billion. That too, was a strategic partnership. 

These partnerships have been picking up in the face of more antitrust scrutiny. A drop in acquisitions by the Magnificent Seven — Amazon, Microsoft, Apple, Nvidia, Alphabet, Meta and Tesla — has been offset by an increase in venture-style investing, according to Pitchbook.

AI and machine-learning investments from those seven tech companies jumped to $24.6 billion last year, up from $4.4 billion in 2022, according to Pitchbook. At the same time, Big Tech’s M&A deals fell from 40 deals in 2022 to 13 last year. 

“There is a sort of paranoia motivation to invest in potential disruptors,” Pitchbook AI analyst Brendan Burke said in an interview. “The other motivation is to increase sales, and to invest in companies that are likely to use the other company’s product — they tend to be partners, more so than competitors.”

Big Tech’s spending spree in AI has come under fire for the seemingly circular nature of these agreements. By investing in AI startups, some observers, including Benchmark’s Bill Gurley, have accused the tech giants of funneling cash back to their cloud businesses, which in turn, may show up as revenue. Gurley described it as a way to “goose your own revenues.”

The U.S. Federal Trade Commission is taking a closer look at these partnerships, including Microsoft’s OpenAI deal and Google and Amazon’s Anthropic investments. What’s sometimes called “round tripping” can be illegal — especially if the aim is to mislead investors. But Amazon has said that this type of venture investing does not constitute round tripping.

FTC Chair Lina Khan announced the inquiry during the agency’s tech summit on AI, describing it as a “market inquiry into the investments and partnerships being formed between AI developers and major cloud service providers.”

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