AI start-ups face a rough financial reality check

But even OpenAI has had challenges broadening sales. Businesses are wary that AI systems can generate inaccurate answers. The technology has also been troubled by questions about whether the data that supported the models infringed on copyrights.

(The New York Times sued OpenAI and Microsoft in December for copyright infringement of news content related to AI systems.)

Money matters

Many investors point to Microsoft’s rapid sales growth as evidence of AI’s business potential. In its most recent quarter, Microsoft reported an estimated $US1 billion in sales from AI services in cloud computing, up from essentially nothing a year ago, said Brad Reback, an analyst at the investment bank Stifel.

Meta, on the other hand, doesn’t expect to make money for years off its AI products, even as it increases its infrastructure spending by up to $US10 billion this year alone. “We’re investing to stay at the leading edge of this,” Mark Zuckerberg, Meta’s CEO, said during a call with analysts last week. “And we’re doing that at the time when we’re also scaling the product before it is making money.”

AI start-ups have been challenged by that gap between spending and sales. Anthropic, which has raised more than $US7 billion with backing from Amazon and Google, is spending about $US2 billion a year but pulling in only about $US150 million to $US200 million in revenue, said two people familiar with the company’s financials, who requested anonymity because the figures are private.

Like OpenAI, Anthropic has turned to partnerships with large, established tech companies. Its CEO, Dario Amodei, has been courting customers on Wall Street, and it recently announced that it was working with Accenture, the global consulting company, to create custom chatbots and AI systems for companies and government organisations.

Sally Aldous, a spokesperson for Anthropic, said thousands of businesses were using the company’s technology and that millions of consumers were using its publicly available chatbot, Claude.

Stability AI, which does image generation, announced last month that its founding CEO, Emad Mostaque, had resigned, just a week after the resignation of three researchers who were part of the five-person team that built the company’s original technology.

It was on track to generate about $US60 million in sales this year against about $US96 million in costs from its image generation system, which has been available to customers since 2022, a person familiar with its business said.

Stability AI’s financial position looks better than those of language-model makers like Anthropic because developing image-generation systems is less expensive, AI investors said. But there’s also less demand to pay for images, so the sales prospects are more uncertain.

Stability AI has been operating without the support of a tech giant. After raising $US101 million from venture capitalists in 2022, it needed more funds last fall but was struggling to show investors that it could sell its technology to businesses, said two former employees, who declined to speak publicly because they were not authorised to do so. It raised $US50 million from Intel late last year but still faced financial pressure, they said.

As the start-up grew, its sales strategy shifted, these people said. At the same time, it was spending millions a month on computing costs. Some investors pressured Mostaque to resign, according to an investor, who declined to speak publicly about a personnel issue. This month, after his resignation, Stability AI did layoffs and restructured its business to put the company on “a more sustainable path,” according to a company memo reviewed by The New York Times. Stability AI declined to comment. Mostaque declined to discuss his exit.

Inflection AI, a chatbot start-up founded by three AI veterans, had raised $US1.5 billion from some of the biggest names in tech. But a year after introducing its AI personal assistant, it had almost no revenue, according to one investor. The Times reviewed a letter that Inflection had sent to investors saying additional fundraising was “not the best use of our investors’ money, especially in the context of the current frothy AI market.”

In late March, it folded its original business and largely disappeared into Microsoft, the world’s most valuable public company.

Microsoft also helped fund Inflection AI, whose CEO, Mustafa Suleyman, rose to prominence as one of the founders of DeepMind, a seminal artificial intelligence lab that Google acquired in 2014. Suleyman founded Inflection AI alongside Karen Simonyan, a key DeepMind researcher, and Reid Hoffman, a leading Silicon Valley venture capitalist who helped found OpenAI and is on Microsoft’s board. Microsoft and Inflection AI declined to comment.

The company was steeped in talented AI researchers who had worked at places such as Google and OpenAI. But almost a year after releasing its AI personal assistant, Inflection AI’s revenue was, in the words of one investor, “de minimis.” Essentially, zilch. It could not continue to improve its technologies and keep pace with chatbots from the likes of Google and OpenAI unless it continued to raise huge sums of money.

Now Microsoft is swallowing most of its staff, including Suleyman and Simonyan. This is costing Microsoft more than $US650 million. But unlike Inflection AI, it can afford to play the long game. It has announced plans for the staff to build an AI lab in London, working with the kind of systems the start-ups are hoping will break through.

This article originally appeared in The New York Times.