Inside the funding frenzy of Anthropic, one of the hottest AI start-ups

Last May, Anthropic, one of the world’s hottest artificial intelligence startups, raised $450 million from investors including Google and Salesforce. It was the start of an astonishing fundraising frenzy.

In August, Anthropic received $100 million from two Asian telecommunications companies. Then Amazon committed $4 billion, followed by another $2 billion from Google.

This month, venture capital firm Menlo Ventures reached a deal to invest $750 million in Anthropic.

In total, the AI ​​start-up raised $7.3 billion in one year. Its five financing operations stood out not only for their speed and scale, but also for their unusual structures.

In one of those deals, Anthropic agreed to use technologies such as chips and cloud computing services from companies that invested in it. This meant, in effect, that part of the money collected would be re-injected into its investors. And to consolidate smaller investors interested in Anthropic, Menlo created a legal entity known as a “special purpose vehicle.”

“These deals are so complicated,” said Dave Brown, a vice president at Amazon Web Services who was involved in Amazon’s deal with Anthropic.

For all of AI’s promise to transform every aspect of society, it started by upending Silicon Valley’s startup deals. Young companies typically raise funds every 15 months or so, after demonstrating that their business has grown. But since generative AI – which can generate text, images, sounds and videos – emerged in late 2022, the rules have been abandoned as investors have fought to get a piece of the most popular developers. fashionable.

Few companies exemplify this shift better than Anthropic, which makes a chatbot called Claude and sells various forms of its AI technology. Over the past year, the startup’s valuation has tripled to $15 billion, said three people familiar with its finances. Monthly revenue reached about $8 million last year and expects that to rise about eight-fold this year, two of the sources said.

Other AI startups, including OpenAI, Character.AI and Cohere, have entered into similar types of investment deals as they work to raise the most money, form the most more lucrative, to hire the best talents and to access the greatest number of computer chips. OpenAI recently closed a deal that values ​​it at $80 billion or more.

Investors can’t afford to lose the stock because “if you miss the winner in space, you’re kind of out of the game,” said Ilya Strebulaev, a finance professor at Stanford.

Some investments by tech giants in AI startups have recently attracted the attention of regulatory authorities. Last month, the Federal Trade Commission announced it had opened an investigation into Amazon and Google’s investments in Anthropic for potential antitrust violations.

An Anthropic spokeswoman said it plans to cooperate with the FTC. The company declined to comment further. Anthropic’s funding from Menlo Ventures was reported earlier by The Information.

Since Anthropic’s founding in 2021, Dario Amodei, the chief executive, and his sister, Daniela Amodei, the president, have positioned it as a startup that would build AI with guardrails. In a podcast interview last year, Dario Amodei said there was a 10 to 25 percent chance that AI technology could destroy humanity.

But if that doesn’t happen, he said, “it’s not going to go very well, it’s going to go really, really well.”

From the beginning, Anthropic’s financing has been unconventional. In 2021, he raised $124 million from investors including Jaan Tallinn, an entrepreneur known for focusing on the existential risks of technology, as well as the Center for Emerging Risk Research, a Swiss nonprofit that aims to “build a guided future through wisdom and compassion for all sentient beings. » (The group changed its name to Polaris Ventures.)

In 2022, Anthropic raised $580 million for research into creating powerful AI technologies and ensuring they do not cause harm. Most of that sum — which dwarfed what venture capitalists had invested in other AI startups — came from Sam Bankman-Fried, the founder of cryptocurrency exchange FTX, and of his colleagues. They belonged to a community known as effective altruists, which has long viewed AI as an existential risk.

When FTX filed for bankruptcy in November 2022 and control of its assets was handed over to new management, Anthropic was left with an uncertain future. Its outlook was reversed a few days later when OpenAI launched the AI-powered chatbot ChatGPT. The technology behind ChatGPT was developed largely by Dario Amodei and others who had worked at OpenAI before leaving to create Anthropic.

This brought attention to Anthropic and Google made its first investment. Anthropic also agreed to purchase computing power through Google’s cloud computing service, which it uses to train and serve its technologies.

In September, Amazon signed a similar deal with Anthropic, investing up to $4 billion. Anthropic’s Claude chatbot was the most popular AI service offered on Amazon’s cloud computing system, Amazon Web Services, a person with knowledge of the matter said.

As part of the deal, Anthropic agreed to build its AI using specialized computer chips designed by Amazon. If Anthropic succeeds, Amazon’s shares in the start-up could be profitable. Meanwhile, the cloud computing deal will improve Amazon’s bottom line.

The deal was structured as convertible notes, or debt that becomes equity when Anthropic hits certain milestones, two people familiar with the structure said.

Amazon’s funding of Anthropic mirrors how OpenAI raised money. In 2019, OpenAI raised $1 billion from Microsoft and spent most of that money buying computing power through Microsoft’s Azure cloud service. Microsoft has since invested another $12 billion in the company, and OpenAI has spent most of that money on Microsoft’s cloud services.

(The Times sued OpenAI and Microsoft, alleging copyright infringement.)

Some investors have interrogates such deals because companies like Google and Amazon invest money that ultimately increases their own revenue. The companies said the arrangements were kosher.

Google’s investment in Anthropic is separate from the startup’s agreement to use its cloud services, said Daniel Gabis, a Google spokesman. They have “always been separated,” he said.

Amazon properly accounts for all revenues and expenses, said Casey McGee, an Amazon spokesperson. “To suggest otherwise, or that AWS’s deal with Anthropic is anything but a normal business deal, is completely false,” he said.

Even after raising billions from Amazon and Google, Anthropic knew it would eventually need more money. Generative AI startups are constantly updating, refining and expanding their technology to make their products accurate, up-to-date and more powerful, which requires huge amounts of expensive computing power.

Finding new investors has been easy for Anthropic. But many of those who were interested wanted to invest between $10 million and $25 million, while the company was aiming for a much larger sum.

In November, Neerav Kingsland, Anthropic’s head of business development, spoke at a conference hosted by Menlo Ventures, which had previously invested. Menlo offered to lead Anthropic’s next round of financing, with a twist: What if the company consolidated all the small investors into a single special purpose vehicle?

This arrangement would save Anthropic time and simplify the process. Mr. Kingsland and Anthropic’s founders were in agreement, a person familiar with the talks said.

Anthropic told investors that $15 billion was the lowest valuation it would accept, two people familiar with the matter said.

After raising the $750 million this month, Anthropic is no longer conducting a formal process to raise funds, a person familiar with the matter said. But investors may soon have another opportunity.

As part of FTX’s bankruptcy proceedings this month, the crypto company asked the U.S. Bankruptcy Court in Delaware for permission to sell its 8% stake in Anthropic. FTX lawyers said they were seeking to move quickly to sell the shares alongside Anthropic’s upcoming funding rounds.

FTX’s understanding “was that Anthropic would continue to pursue additional rounds of equity financing,” the lawyers wrote.