It's a classic underdog story: Character AI, despite its innovative edge, which went underappreciated during its founders' tenure under Google, now faces an uphill battle against larger, well-funded rivals like Meta. They exemplify a missed opportunity for one giant – Google, now seemingly eager to rejoin the fray; and serve as an inspiration for another – Meta, possibly leading to Character AI's eventual crash, given how hard it is to compete with a company of over 3 billion users, especially having almost no revenue, nor a sustainable business model.
What put it on our list? Only eight months ago, in March, the startup raised $150 million in a funding round led by Andreessen Horowitz (a16z), achieving a valuation of over $1 billion. Recently, there's been news of Google's interest in investing 'millions', potentially elevating the company's valuation to over $5 billion. This situation turns Character AI into a potentially significant player in our AI Unicorn family list.
However, there's also a profound risk of failure.
So what is Character AI? Let’s take a closer look at what we already know about them:
Google didn't pay enough attention – the starting point of Character AI
De Freitas' childhood dream to talk to computers: the vision behind Character AI's mission
Character AI's financial situation: from seed rounds to Google's multi-million dollar interest
Character AI’s main offer: tapping into the Artificial General Intelligence (AGI) concept
Tech behind Character AI’s product
How does Character AI make money?
Conclusion
Why Did Google Miss the Character AI Opportunity?
Daniel De Freitas and Noam Shazeer. Source: https://www.bizjournals.com/
During their time at Google, Noam Shazeer and Daniel De Freitas were instrumental in the projects that could have emerged as significant as ChatGPT did. In 2017, Noam Shazeer co-authored the seminal paper 'Attention Is All You Need,' laying out the groundbreaking Transformer architecture, which catalyzed the generative models uprise. He was also the first to scale Transformers to supercomputers and pioneered large-scale pretraining. Drawing on this attention paper, Daniel De Freitas, in 2020, initiated and led the Meena project, which was later renamed LaMDA. This 2.6 billion parameter, end-to-end trained neural conversational model, unveiled in 2021, was capable of… chatting about anything.
Sounds familiar, doesn't it? However, Google held back on these innovations. Shazeer’s proposal for a chatbot never materialized at Google, hindered by concerns over potential missteps in its responses. Google's executives repeatedly dismissed the idea, at least once stating that the AI didn’t align with the company’s standards for safety and fairness in AI systems.
Consequently, at the end of 2021, both Shazeer and De Freitas resigned from Google and founded Character AI – a startup focused on creating chatbots capable of mimicking famous personalities.
De Freitas' childhood dream to talk to computers: the vision behind Character AI's mission
De Freitas wanted to talk to his computer since he was a child. He told The Information that when he was 9 and beginning to learn how to write code, he built a program that could seemingly hold a conversation, an experience that left him mesmerized.
Thus, Character AI’s mission became to revolutionize human-chatbot interactions, aiming to provide hyperrealistic, customizable chatbots capable of companionship, emotional support, and even romantic connections, catering to a variety of human desires. Allegedly, this is all in service of helping people live their best lives. At least, that’s the narrative that has attracted a few large investors. AI companions have been a hot topic in 2023.
This vision led to the creation of a platform hosting over 14 million unique chatbots, demonstrating their commitment to user-driven innovation.
We started Character to lead the AI revolution and to bring joy and value to billions of people at each step along the way
Character AI's financial situation: from seed rounds to Google's multi-million dollar interest
Source: Turing Post Research
It’s not entirely clear how much exactly they raised and when, but apparently, there was a seed round either in December 2021 or January 2023.
The big numbers happened in March 2023. The lofty pitch about AI companions certainly resonated with investors amid the GenAI craze, leading to a significant milestone within 16 months of Character AI's establishment: $150 million in funding from backers, led by Andreessen Horowitz (a16z), valuing the company at $1 billion, despite having no revenue at this point. As you probably remember from our previous editions, Inflection also converted into a unicorn in 2023 with a similar mission of “creating a personal AI for everyone.”
And Google is back! The company which initially rejected the idea of making the technology accessible to outsiders, is now striving hard to reach the vast audience that OpenAI has tapped into. Two years after Character AI’s launch, and a year following ChatGPT's mind-blowing debut, Google expressed a desire to invest ‘hundreds of millions of dollars’ in Character AI, as reported by Reuters.
Google’s efforts continue, as it recently made its chatbot, Bard, available to the 13-18 age group – a move that's facing criticism online. Google is also fervently backing other top generative AI startups. Just recently, it committed $2 billion to Anthropic. Things are heating up!
Character AI’s main offer: tapping into the Artificial General Intelligence (AGI) concept
After its soft launch in September, the founders officially introduced the Character AI platform as “a full-stack Artificial General Intelligence (AGI) company” in December 2022. By that time, their beta was already generating 1 billion words per day.
That’s not cheap.
In 2023, the company added a group chat feature, which allows users to create a chat group with their favorite AI characters or mix in some humans, as stated by the company. The idea is for users to connect with friends, share ideas, and collaborate in real-time, like in any other group chat, alongside their AI buddies.
As of the end of November 2023, according to Similarweb, the company's website, where users can interact with already created characters or create their own, is visited by approximately 160 million users monthly.
How Does Character AI's Technology Work?
Character AI utilizes a proprietary Large Language Model (LLM) developed from scratch. This model uniquely focuses on conversational empathy and intelligence, engaging users with humor, emotion, and insight. Their latest model, C1.2, builds upon its predecessor C1.1, offering capabilities like drafting emails, assisting with test preparation, and brainstorming, alongside entertainment and emotional connections.
Character AI’s approach involves neural language models that process extensive text data, predicting subsequent words in various contexts. However, specific details about their machine learning and neural network techniques are not extensively disclosed.
As a full-stack AI company, Character AI handles everything from training its language models to designing user interfaces, allowing for highly personalized user experiences.
The company's technology utilizes substantial computational resources, including 1,000 Nvidia A100 GPU chips, primarily leased from Google Cloud and others. This setup supports the training of AI models with significant computing power, with considerations for a future dedicated GPU cluster.
Through a strategic partnership with Google Cloud, Character AI taps into Google’s advanced AI infrastructure. They use Tensor Processor Units (TPUs) and NVIDIA H100 Tensor Core GPUs, boosting model training and inference capabilities. This partnership also leverages Google Cloud’s databases like AlloyDB and Spanner, promoting operational efficiency and scalability, and signifies Character AI's drive to advance conversational AI technologies globally.
The company's privacy practices, like many in the generative AI field, include collecting usage information and monitoring content for appropriateness.
How does Character AI make money?
So far, character.ai+ is the only form of monetization that Character AI has.
Most of the audience sticks with the free version though, and it's not cheap for Character AI to run and train all those chatbots. Of course, these conversations help the chatbots learn faster.
Shazeer envisions keeping the platform both free and ad-free, but realistically, market pressures will likely push the company to devise some kind of money-making plan eventually.
Their investor a16z believes that:
End-to-end apps such as Character AI, which both control their models and own the end customer relationship, have a tremendous opportunity to generate market value in the emerging AI value stack.
But that’s the role of the main investor – to back the company publicly and justify their investment.
Founder’s views toward AI risks
Noam Shazeer is optimistic about the potential of AI, particularly in advancing towards Artificial General Intelligence (AGI). He envisions AI use cases extending beyond entertainment, anticipating "magical moments" where AI characters could facilitate human interactions in group chats. However, Shazeer is aware of the potential risks, such as emotional dependence and alienation caused by AI. He compares the impact of AI on teenagers to the introduction of messaging apps, suggesting a transformative yet manageable influence.
But as Character AI gets more money and users, it's also bringing up tricky questions about the future of generative AI tools. For example, the site already has at least 20 different versions of Mickey Mouse, which belongs to Walt Disney Co. That could lead to legal problems. And there are lots of copycats – pretending to be both real and made-up famous people – raising a bigger question: Who gets to control a fake personality on the supercharged internet with AI?
Conclusion
Character AI's journey epitomizes the dynamic and unpredictable nature of the AI industry. A significant advantage for Character AI is its independence from other APIs; it has built its models (though details are sparse) and operates as a full-stack company. On the downside, the need to develop a sustainable business model, manage intellectual property concerns, and navigate the ethical implications of AI-driven emotional connections are critical challenges that the company must address.
Additionally, the increasingly competitive landscape of generative AI tools raises questions about Character AI's long-term viability in an industry where rapid technological advancements and shifting market dynamics can quickly change the playing field.
It will be interesting to watch them navigate all these challenges.
Bonus: All important links about the founders and CEO
Noam Shazeer – Co-Founder and CEO
Daniel De Freitas – Co-Founder and President
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Previously in Unicorn Chronicles:
