Finance4U

Here’s how Microsoft is providing a ‘good outcome’ for Inflection AI VCs, as Reid Hoffman promised


Exactly how much Microsoft is paying all the investors of Inflection AI as part its oddly structured deal to abscond with the co-founders, much of the staff and the rights to use the tech hasn’t been publicly revealed. And Microsoft declined comment when asked.

But unnamed sources tell The Information that it’s plunking out approximately $650 million: $620 million for non-exclusive licensing fees for the technology (meaning Inflection is free to license it elsewhere) and $30 million for Inflection to agree not to sue over Microsoft’s poaching, which includes co-founders Mustafa Suleyman and Karén Simonyan.

Microsoft board member Reid Hoffman, also a co-founder of Inflection and an investor in it, along with his VC firm Greylock, did promise “that all of Inflection’s investors will have a good outcome today, and I anticipate good future upside,” in a LinkedIn post earlier this week.

Investors in the early $225 million round will be getting 1.5 times their investment; those in the later $1.3 billion round will get 1.1 times their investment, according to The Information. While that math doesn’t add up to $650 million, these investors will also retain their equity in the skeleton of the startup that remains. The new company, however, will be pivoting away from building a personalized AI chatbot named Pi on a massive computer structure of 22,000 of Nvidia’s expensive, hard-to-find AI chips. It will now become an AI studio helping other companies work with large language model AI.

Inflection did not respond to a request for comment.

In its short life as an aspiring OpenAI competitor — it was founded in 2022 — Inflection raised its more than a billion at a $4 billion valuation — from a who’s who: Microsoft co-founder Bill Gates, Microsoft itself, as well as former Google CEO Eric Schmidt, Dragoneer Investment Group, Nvidia and others.

Just to state the obvious: Microsoft provided a soft landing for Gates (who is technically no longer with the company but still a godlike figure there) and its board member’s VC firm, for their expensive, and possibly fruitless AI venture. The big cloud vendors have all already lined up with other chatbot partners: Microsoft with OpenAI, Google and Amazon with Anthropic, Cohere picking up assorted others like Oracle and Salesforce.

If and when Inflection ever perfected Pi on its enormous AI infrastructure, the race looked to be already lost.

Interestingly, the money Microsoft is spending to gut this startup may be worth it. True, Suleyman has a somewhat cloudy reputation as a boss, according a 2021 investigation by The Wall Street Journal that alleged bullying behavior. But Microsoft itself, while kinder and softer under CEO Satya Nadella, still has a long history as a tough workplace.

And who better to hire than the founder and technical geniuses behind Google DeepMind, now with experience building an LLM? The co-founders are familiar with Google’s secrets well as next-gen AI. Simonyan, for instance, helped spearhead AlphaZero, the AI that mastered the board game Go.

Despite close ties with OpenAI, Microsoft also has many reasons to be needing a backup for its all-important AI gambit. For one, the FTC said it’s looking into its deal with OpenAI, as well as Anthropic’s deals with Amazon and Google. Should some sort of FTC mandates be issued, Microsoft would be wise to have options.

Plus, word is that some of Microsoft’s engineers and OpenAI’s engineers don’t have the most loving relationship, Business Insider has reported. Then there was the Sam Altman firing saga that had Nadella telling the world he was absorbing Altman and much of OpenAI, only to walk it back.

There are so many red flags with OpenAI that Microsoft is wise to wean its dependence.

Then again, just like Microsoft’s investment in OpenAI, we wonder if regulators will also have something to say about this deal.

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