Character A.I.'s Funding Might mean we are in a Generative A.I. Bubble

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Generative A.I. enthusiasm literally knowns no bounds. A 16-month startup can consider it has a $1 Billion market cap without any revenue. As bullish as we might be in the future of A.I., this is a red flag about Venture Capital around unproven startups in the space.

With a16z though, early big bets are not uncommon. Character.AI said it raised $150 million in a funding round led by Andreessen Horowitz.

The steady march of eye-popping investments into companies developing large language models (LLMs) continues and it’s getting a bit ridiculous.

Character.ai is a neural language model chatbot web application that can generate human-like text responses and participate in contextual conversation. Constructed by previous developers of Google's LaMDA, Noam Shazeer, and Daniel De Freitas, the beta model was made available to use by the public in September 2022.

It’s all to me a bit unhinged. Generative A.I. startups have the characteristics of a bubble given the tough times and bank closures such as Silicon Valley Bank (SVB) and how bad startup funding is going to get and likely be in the decade ahead.

I guess leaving Google is profitable then? The two-year-old company said on Thursday that it raised $150 million at a $1 billion valuation in a funding round led by Andreessen Horowitz. Noam Shazeer and Daniel De Freitas, who helped created the architecture used in popular chatbots, left Google in 2021 and founded Character.AI the same year.

This is About Personalization of our own Personal Assistants

Sarah Wang tries to get us excited about this implementation of LLMs, which just isn’t compelling. Character.AI – is essentially a platform for creating and chatting with different AI characters – have turned from purely novelty question-asking into the back-and-forth of a meaningful relationship so they claim. A meaningful relationship?

Character.AI said in a press release announcing the funding that its technology gives “users the ability to create a fully-customizable and personalized AI companion with a distinct personality and values.”

But do I want to role-play with a fake Elon Musk or some dead historical figure? Really? The company offers AI chatbots that allow users to chat and role-play with, well, anyone — living or dead, real or imagined. Think historical figures like Queen Elizabeth and William Shakespeare, for example, or fictional characters like Draco Malfoy (Character AI includes warnings like “Remember: Everything Characters say is made up!”)

Listen I can understand there’s a lot of hype and flashy A.I. “announcements”, but if you aren’t profitable you better have a good plan to be. Character.AI said the fresh capital will allow it to expand its “compute abilities resulting in a more sophisticated model with advanced reasoning and greater accuracy.” The money will help the company grow its 22-person team and add technical abilities. The company said it’s nearing 100 million site visits per month, “a four-fold increase in two months.”

A 22-person team with zero revenue thinks its worth $1 Billion.

“Remember, Everything Characters say is made up”

The above disclaimer streaks everywhere.

What can you do with $150 million a bunch of chatbots for me soon?

Advent of C1.2

We started Character.AI to bring personalized superintelligence to everyone on Earth. Building towards this goal, we're excited to announce our Series A, led by a16z, and the early preview release of C1.2, our new smarter model. Whether you need help drafting a difficult email, a laugh, a study buddy, or emotional reassurance, C1.2-powered Characters can help.

Character.AI thinks their chatbots are heralding meaningful connections. They add:

🚀 Growth

In the 5 months since we launched Character.AI, our users have sent over 2 billion messages! Our growth is accelerating – the second billion entirely came in the last month. Active users spend on average over 2 hours daily interacting with our AI.

Our AI has fostered meaningful connections with our users, and the feedback from our community has been truly touching:

For $150 million, it better be truly touching!

Sarah Wang joining their board. Let’s roly-play guys!

Venture Backing

Series A fundraising round at a $1 billion valuation led by Andreessen Horowitz (a16z) with participation from previous investors, including Nat Friedman (former GitHub CEO), Elad Gil, SV Angel and A Capital.

The problem is in the new VC reality, a16z trying to drive up valuations just won’t work and be sustainable. You might recall the 10-figure valuation for a company that’s reportedly pre-revenue is reminiscent of other recently hyped technologies like crypto (or more broadly Web3) and social audio. Andreessen Horowitz has been a significant player in driving up prices in both markets. (Full disclosure: Substack is led by a16z funding).