How Google, Microsoft And Amazon Are Raiding AI Startups For Talent

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Startups are becoming pawns in the megacap game of chess. Microsoft absorbs Inflection, signaling major organizational changes around AI. Amazon consumes Adept, a startup valued at over $1 billion, with much of the company now part of Amazon. Google partners with Character.AI. These tech giants are swallowing some of the biggest AI startups without actually acquiring them.

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We see rapid consolidation in the tech world, where big players are stifling competition, poaching top talent, and avoiding regulatory scrutiny, while regulators are still playing catch-up. This week on Tech Check, Deirdre Bosa explores the AI M&A fakeout.

Character.AI was one of the most promising startups in the generative AI space. With highly engaging software and a loyal user base, it received $150 million in funding at a $1 billion valuation. In September, Character.AI's software garnered over 173 million visits, a 61% increase from March. Despite its potential, the startup struggled to monetize, facing difficulties generating revenue from paid users. It felt reminiscent of the 2010 App Store era, where gaining users came first, and figuring out monetization happened later.

Character.AI turned to Google, which was more interested in its talent than its technology. Co-founder Noam Shazeer, a key figure in AI innovation, was brought back to Google along with a portion of the startup’s employees. This allowed Google to license Character.AI’s technology without the need for a full acquisition, enabling it to dodge potential regulatory challenges.

Microsoft has also been using this playbook. In March, it secured a $650 million deal with Inflection, allowing it to use the AI startup's models and hire most of its staff, including co-founder Mustafa Suleyman, to lead its AI unit. Amazon followed a similar path with Adept AI, paying over $330 million to license its technology and offering $100 million in retention bonuses to employees.

For startups, these deals offer relief from pressures to monetize while securing cloud computing and other resources needed to develop generative AI models. The tech giants, in turn, get access to top talent in the field. This strategy allows them to navigate regulatory scrutiny while acquiring valuable expertise.

However, regulators are catching on. The FTC has opened antitrust probes into Microsoft's deal with Inflection and Amazon’s arrangement with Adept. Congress has also taken notice, with U.S. Senators calling for investigations into these deals. Regulators are particularly concerned about consolidation in this nascent AI industry, where competition is essential for fostering innovation.

While these deals may appear to benefit both parties, employees and investors often get left behind. In the Adept deal, Amazon only hired AI researchers, leaving other teams, such as those in sales and product development, out in the cold. Venture capitalists who invested in startups like Character.AI, Adept, and Inflection may get their money back through licensing deals, but the returns are far lower than the high payoffs they initially sought.

As more overvalued AI startups continue to face challenges with monetization, these types of deals—where megacaps like Google, Microsoft, and Amazon license technology and hire top talent without fully acquiring the startups—could become more frequent. For example, Cohere, another AI startup valued at over $5 billion, reportedly generates less than $25 million in annualized revenue. A deal with a big tech player could provide the necessary resources for survival as pressure to monetize grows.

However, as regulators become more aware of these "pseudo-acquisitions," the question remains whether big tech companies will continue to take risks with such deals. Regulatory bodies like the FTC and Congress are increasingly scrutinizing these partnerships, concerned about the potential for monopolization and a lack of competition in the AI space. The consolidation of talent and technology into the hands of a few megacap companies raises concerns about innovation being stifled.

For now, these deals allow AI startups to avoid the immediate pressures of monetization while gaining access to resources that would otherwise be out of reach. At the same time, they provide big tech companies with critical talent and technology to stay competitive in the AI arms race without directly confronting antitrust regulators.

But as the landscape continues to evolve, the AI unicorns could be left to fend for themselves if megacaps decide the regulatory risk is too high. Whether these startups will manage to survive independently or be absorbed by larger entities remains an open question. What’s clear is that the AI M&A fakeout has altered the trajectory of the generative AI sector, setting the stage for a future where competition, innovation, and regulation collide.