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A new area of ​​AI expansion, even in the midst of technological darkness

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Five weeks ago, OpenAI, an artificial intelligence lab in San Francisco, launched ChatGPT, a chatbot that answers questions in clear, concise prose. The AI-powered tool immediately caused a sensation, with over a million people using it to create everything from poetry to high school assignments to Queen song rewrites.

Now OpenAI is in the midst of a new gold rush.

The lab is in talks to complete a deal that would value it at about $29 billion, more than double its 2021 valuation, said two people with knowledge of the discussions. The potential deal — in which OpenAI would sell existing shares in the company in a so-called public offering — could total $300 million, depending on how many employees agree to sell their shares, they said. The company is also in talks with Microsoft — which invested $1 billion in 2019 — for additional funding, two people said.

The clamor around OpenAI shows that even in the worst technology crisis in a generation, Silicon Valley’s business-making machine is still working. After a humiliating year that included massive layoffs and cuts, tech investors — a naturally bullish bunch — can’t wait to get in on a hot trend.

No field has created more excitement than generative artificial intelligence, the term for technology that can generate text, images, sounds and other media in response to short prompts. Investors, experts and journalists have been talking about artificial intelligence for years, but the new wave – the result of more than a decade of research – represents a more powerful and mature breed of AI.

This type of AI promises to reinvent everything from online search engines like Google to photo and graphics editors like Photoshop and digital assistants like Alexa and Siri. Ultimately, it could provide a new way to interact with almost any software, allowing people to talk to computers and other devices as if they were talking to someone else.

This has caused the negotiation around generative AI companies to accelerate. Jasper, a generative AI start-up founded in 2021, raised $125 million in October, valuing it at $1.5 billion. Stability AI, the imaging company founded in 2020, raised $101 million in the same month, valuing it at $1 billion. Smaller generative AI companies including Character.AI, Replika and You.com have also been flooded with investor interest.

In 2022, investors pumped at least $1.37 billion into generative AI companies across 78 businesses, nearly as much as they invested in the previous five years combined, according to data from PitchBook, which tracks financial activity across the industry.

OpenAI’s $29 billion valuation was previously reported by The Wall Street Journal. Venture capital firms Thrive Capital and Founders Fund may buy shares in the public offering, two people said. Since OpenAI started as a not-for-profit company, it’s hard to pinpoint its accurate valuation.

OpenAI, Thrive Capital and Founders Fund did not provide comment on the proposed investment.

Companies have been developing generative AI for years, including tech giants like Google and Meta, as well as ambitious start-ups like OpenAI. But the technology didn’t come to the public’s attention until this past spring, when OpenAI unveiled a system called DALL-E that allowed people to generate photorealistic images simply by describing what they wanted to see.

This has inspired entrepreneurs to dive in with new ideas and investors to make sweeping proclamations of disruption. Their enthusiasm reached new heights in December after OpenAI launched ChatGPT, with fans leveraging the technology to generate love letters and business plans.

“It’s the new kind of ‘mobile’ paradigm shift we’ve all been waiting for,” said Niko Bonatsos, an investor at venture capital firm General Catalyst. “Maybe bigger too.”

Sequoia Capital investors wrote that generative AI had “the potential to generate trillions of dollars in economic value.” And Lonne Jaffe, investor at Insight Partners, said: “There’s definitely an element to this that feels like the early launch of the Internet.”

Google, Meta and other tech giants are reluctant to release generative technologies to the general public because these systems often produce toxic content, including misinformation, hate speech and biased imagery against women and people of color. But smaller, newer companies like OpenAI — less concerned with protecting an established corporate brand — are more willing to release the technology publicly.

The techniques needed to build generative AI are widely known and freely available through academic research papers and open source software. Google and OpenAI have an advantage because they have access to deep pockets and raw computing power, which are the building blocks of the technology.

Still, many of the top researchers at Google, OpenAI, and other leading AI labs have gone off on their own in recent months to found new startups in the field. These startups have received some of the biggest rounds of funding, with the excitement around ChatGPT and DALL-E driving venture capital firms to invest in even younger companies.

More than 450 start-ups are now working on generative AI, according to one venture capital firm’s count. And the frenzy was compounded by investors’ eagerness to find the next big thing in a dismal environment.

Michael Dempsey, an investor at venture capital firm Compound, said the technology downturn — which in the past year has included a crypto crash, underperforming stocks and layoffs at many companies — has created a lull among investors.

So, “everybody got excited about the AI,” he said. “People need something to tell their investors or themselves, honestly, there’s a next thing to be excited about.”

Some fear that the hype around generative AI has outgrown the reality. The technology has raised thorny ethical questions about how generative AI can affect copyright and whether companies need to get permission to use the data that trains their algorithms. Others believe that big tech companies like Google will quickly defeat young start-ups and that some of the new companies have little competitive advantage.

“There are a lot of teams that don’t have any competency in AI that are presenting themselves as AI companies,” Dempsey said.

These concerns haven’t dampened the enthusiasm, especially after the arrival of Stability AI in October.

The start-up helped fund an open source software project that quickly developed imaging technology that worked very similarly to the DALL-E. The difference was that while OpenAI had only shared DALL-E with a small number of testers, the open source version of Stability AI – Stable Diffusion – could be used by anyone. People quickly used the tool to create photorealistic images of everything from a medieval knight crying in the rain to Disneyland painted by Van Gogh.

In the ensuing excitement, Eugenia Kuyda, founder and chief executive of chat bot startup Replika, said in an interview that she was contacted by “every venture capital firm in Silicon Valley,” or more than 30 companies. She took the calls but decided against further funding because her company, founded in 2014, is profitable.

“I feel like the person who arrived at the airport a week early for a flight – and now the flight is boarding,” she said.

Character.AI, another chat bot company, and You.com, which is adding chat technology to its Internet search engine, have also been flooded with interest from venture capitalists, the companies said. .

Sharif Shameem, an entrepreneur who built a searchable database for images created by Stable Diffusion in August called Lexica, said his tool quickly reached one million users – a sign that he should switch from his existing start-up to focus on in Lexica. Within weeks, he had raised $5 million in funding for the project.

Shameem likened the momentum around generative AI to the advent of the iPhone and mobile apps. “It feels like one of those rare opportunities,” he said.

Jaffe of Insight Ventures said his firm has since encouraged most of its portfolio companies to consider incorporating generative AI technology into their offerings. “It’s hard to think of a company that couldn’t use it in some way,” he said.

Radical Ventures, a venture capital firm in Toronto, one of the global centers of AI research, was created five years ago specifically to invest in this type of technology. It recently launched a new $550 million fund dedicated to AI, with more than half of its investments in generative AI companies. Now those bets look even better.

“For four and a half years, people thought we were crazy,” said Jordan Jacobs, a partner at Radical. “Now, for the last six months, they thought we were geniuses.”

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