What Was the Point of Inflection?
Various Headlines
So many questions about this Microsoft/Inflection deal. Wait a minute, strike that. There is no deal. Well, there may be a deal – Inflection, what's left of it, is poised to use Azure to host their models, it seems, and why might they do that after Microsoft just snatched their key employees... – but it's not directly discussed.
Instead, this is Microsoft hiring two of the co-founders of this company, Mustafa Suleyman and Karén Simonyan, while the third, Reid Hoffman, already sat on Microsoft's board prior to this. On that board he'll remain, as well as Inflection's. Because the company is not shutting down despite losing their leaders. And, in fact, much of their team to Microsoft, it would seem (but again, isn't directly stated).1 Instead, they're pivoting from consumer to be focused on enterprise sales for the consumer product they built. Why? It's unclear. Presumably because they've raised billions of dollars. But they raised it largely from, yes, Microsoft.
So...
I made the joke earlier, but it's really not a joke: I'm glad that Microsoft, having narrowly avoided a messy situation with OpenAI just four months ago, found a new and unique way to create a messy situation. This is a total mess.
Just read all of the different blog posts and press coverage and you'll get a sense of it. If you can wade through the obfuscation, it seems pretty clear that Inflection's first product, Pi, wasn't working as well as the team might have liked – despite the non-stop mentions on how well it was performing; hence the pivot to enterprise, of course – and while they presumably still had years of runway, everything is moving so fast with AI and so much money is needed, that perhaps they were just ready to call it a day. And an obvious way to end such an endeavor would be to sell to their largest investor, Microsoft, in a talent deal. Except Microsoft (like every other tech giant, but probably especially Microsoft in this particular space), can't really acquire a company like this one at the moment given the regulatory environment. So instead, they pulled out the old playbook they nearly ran with OpenAI a mere four months ago: let's just hire the whole company.
Of course that gameplan, I suspect, was largely to give Sam Altman some leverage to be installed as the head of OpenAI. And it worked! This is almost a bizarro version of that plan because they are actually hiring the team while leaving the carcass of the company behind. Why? Because it probably looks better for said regulatory concerns. Otherwise, it would obviously be an acquisition by other means. Now it's just pretty clearly that.
Speaking of OpenAI, what do they think of all this? They're quoted in the Bloomberg article on the matter (again, not deal – totally no deal here), but curiously, it's not Altman giving the quote, but just an "OpenAI spokesperson". Maybe there's nothing to read into that, but maybe there is! Microsoft already had internal teams working on AI, of course, but Suleyman and Simonyan would seem to be an indication that it either wasn't working as well as Microsoft liked or they needed a better hedge against their partner in OpenAI. The partner with all the consumer mindshare in the space at the moment, not Microsoft.
Anyway, the gut reaction here was to think: wow, Microsoft is really screwing over some investors who just eight months ago valued Inflection at $4B.2 But then you recall that again, Microsoft is the key investor here. And two of the others, Hoffman (and, by extension, Greylock) and Bill Gates, are directly affiliated with Microsoft, of course. Eric Schmidt is a bit of a wildcard here. He is, of course, years removed from Google at this point, but what does he think? And what about the one new named investor in the last ($1.3B) round: NVIDIA? They probably haven't heard the news over the massive cheers around their new offering yesterday. (They won't care, they'll just sell more chips to Microsoft and fewer to Inflection.)
Will.i.am might care? Will anyone ask Mr. i.am? Oh and Suleyman's OpenAI co-founder, Demis Hassabis. Now, of course, leading Google's AI efforts. Might be worth getting his take on this particular personal investment...
I suspect we won't have to ask the Justice Department for their take because they'll probably be giving some initial thoughts shortly in the form of an inquiry. Microsoft, of course, has to know that is coming since again, this is almost the bizarro version of the OpenAI deal, it's still going to be viewed as problematic by many for many of the same reasons. Think of it this way: Microsoft has effectively acquired two of the leading AI companies in recent months without having to actually acquire them. Funny that.
Update :To the investor outcome question, Hoffman writes on LinkedIn (another company he co-founded way back when)3:
I'm grateful for the support of early investors, including Greylock, who believed in the company and vision from day one. This agreement with Microsoft means that all of Inflection’s investors will have a good outcome today, and I anticipate good future upside.
That reads as if there is money coming back to investors today – but perhaps off the company balance sheet and not from Microsoft? Because again, there is no deal. The "upside" would then rely on the remaining Inflection company finding a good eventual outcome (though see: footnote #2 below)...
Update 2: Now Forbes and Bloomberg and The Information have seemingly gotten to the bottom of the no-deal deal. Good job, reporters.
Investors in Inflection, which has raised more than $1.5 billion, will be made whole, according to a person familiar with the situation who asked to remain anonymous because the information is private. The person declined to describe how or when investors would be paid. Inflection’s backers include Microsoft, Nvidia Corp., Bill Gates and Reid Hoffman, who is also a co-founder.
So the "good outcome" Hoffman references above is investors being "made whole". While also:
A person familiar with the matter said that existing investors will remain equity holders in Inflection and retain potential for any future upside in the startup. Inflection would not disclose terms of the deal or how many of its 70 employees would remain.
I'm still curious (again, per footnote #2) about that last $4B valuation though as this would seem to be a very different company!
A bit more detail on the Inflection / Microsoft news: sources tell me at @Forbes that there's an undisclosed financial component to Inflection's licensing its API to Microsoft, providing a path for Inflection investors to be made whole over time.
Aha! A licensing deal for access to Inflection's APIs...
And more detail on that, here's Natasha Mascarenhas and Aaron Holmes:
At the same time it revealed the staff departures, Inflection disclosed a licensing deal with Microsoft to make its models available for sale on Microsoft’s Azure, and said other cloud platforms would follow. It has also told investors they will fully recoup their investment, and more, as a result of the licensing agreement, according to a person briefed on the arrangement. Inflection has raised over $1.5 billion from investors including Microsoft and Greylock.
It is unclear what the size of the payout will be and whether it will come in a lump sum or over time. In addition to the payout, investors will keep their equity, ensuring they can profit if Inflection is bought or goes public, according to two people briefed on the arrangement.
While, as noted, Inflection had raised over $1.5B, if you assume that a large chunk of that was from Microsoft, and that a large chunk of that was in cloud credits (and perhaps NVIDIA's deal was structured in a similar manner for deals on GPUs), there's potentially less to make whole here. Still, there's likely hundreds of millions that investors paid into the company. Per above, maybe some of that is coming back off the balance sheet since:
With most of its staff joining Microsoft, Inflection has told investors its costs will be lower as it aims to profit from selling the models.
But still, this is Microsoft paying a lot of money for a licensing arrangement that the open market likely would not dictate here. I'm reminded of a scene from the film version of Clear & Present Danger:
Jack Ryan: Harden was doing business with these businesses, importing among other things coffee, which in an of itself means nothing but he was paying a little bit too much for this coffee. Um, $6,200 a pound if my arithmetic is correct.
President Bennett: Well that's expensive coffee.
This is expensive coffee.
Update 3 on 3/22/24: Last one on this topic, I think! A lot more details about the totally not an acquisition deal...
M.G. Siegler
1 To put it as carefully as possible: "Several members of the Inflection team have chosen to join Mustafa and Karén at Microsoft."
2 If the startup was previously valued based on Suleyman's and Simonyan's pedigree plus a lot of cloud credits from Microsoft and a little bit of consumer traction, how might it be valued now, operating in a new arena with new leadership? Surely someone will care about that.
3 Remember too that Hoffman used to be on the board of OpenAI. Until he had to step off because of... Inflection. Like I said, messy!