A look inside the Funding Frenzy at Anthropic, one of the hottest AI startups
Last May, Anthropic, one of the world's hottest artificial intelligence startups, raised $450 million from investors including Google and Salesforce. It was the start of an astonishing wave of funding.
In August, Anthropic secured $100 million from two Asian telecom companies. Amazon then committed $4 billion, followed by another $2 billion from Google.
This month, venture capital firm Menlo Ventures closed a deal to invest $750 million in Anthropic.
All told, the AI start-up raised $7.3 billion in one year. The five financing agreements were notable not only for their speed and scale, but also for their unusual structures.
In one such deal, Anthropic agreed to use technology such as chips and cloud computing services from the companies that invested in it. That essentially meant that some of the money raised would be pumped back to investors. And to consolidate smaller investors interested in Anthropic, Menlo created a legal entity known as a “special purpose vehicle.”
“These deals are so complicated,” said Dave Brown, vice president of Amazon Web Services and involved in Amazon's deal with Anthropic.
Despite AI's promise to transform every aspect of society, it has begun to upend the deals of Silicon Valley startups. Young companies typically raise money every fifteen months after they have shown that their business has grown. But since generative AI – which can generate text, images, sound and video – arrived on the scene in late 2022, the rules have been thrown out as investors have fought for a slice of the hottest developers.
Few companies illustrate this shift better than Anthropic, which makes a chatbot called Claude and sells various forms of its AI technology. Over the past year, the startup's valuation has tripled to $15 billion, three people with knowledge of the finances said. Last year, monthly sales were about $8 million and expected to grow about eightfold this year, two of the people said.
Other AI startups, including OpenAI, Character.AI and Cohere, have made similar investment deals as they race to raise the most money, form the most lucrative partnerships, hire the best talent and gain access to the most computer chips. OpenAI recently closed a deal that values it at $80 billion or more.
Investors can't afford to lose this play because “if you miss the winner in the room, you're more or less out of the game,” said Ilya Strebulaev, a finance professor at Stanford.
Some investments in AI startups by the tech giants have recently caught the attention of regulators. Last month, the Federal Trade Commission said it had opened an investigation into Amazon and Google's investments in Anthropic for possible antitrust violations.
A spokeswoman for Anthropic said it planned to cooperate with the FTC. The company declined to comment further. Anthropic's financing from Menlo Ventures was reported previously by The Information.
Since Anthropic's founding in 2021, Dario Amodei, the CEO, and his sister, Daniela Amodei, the president, have positioned it as a startup that would build AI with guardrails. In a podcast interview last year, Dario Amodei said the chance of that happening was 10 to 25 percent AI technology can destroy humanity.
But if that doesn't happen, he said, “things won't just be good, they'll be really great.”
From the start, Anthropic's financing was unconventional. In 2021 it is increased $124 million from investors including Jaan Tallinn, an entrepreneur known for his focus on the existential risks of technology, as well as the Center for Emerging Risk Research, a Swiss nonprofit that aims to “build a future that guided by wisdom and compassion for all sentient beings. (The group has changed its name to Polaris Ventures.)
In 2022, Anthropic increased $580 million for research into building powerful AI technologies and working to ensure they don't cause harm. The bulk of that sum — which dwarfed what venture capitalists had invested in other AI startups — came from Sam Bankman-Fried, the founder of the FTX cryptocurrency exchange, and his colleagues. They belonged to a community known as effective altruists, who have long viewed AI as an existential risk.
When FTX filed for bankruptcy in November 2022 and control of its assets was transferred to new management, Anthropic was left with an uncertain future. Days later, the outlook turned when OpenAI released the AI-powered chatbot ChatGPT. The technology underlying ChatGPT was largely developed by Dario Amodei and others who had worked at OpenAI before leaving to create Anthropic.
That brought Anthropic's attention and Google made its first investment. Anthropic also agreed to buy computing power through Google's cloud computing service, which it uses to train and operate its technologies.
In September, Amazon signed a similar deal with Anthropic, investing up to $4 billion. Anthropic's Claude chatbot was the most popular AI service offered on Amazon's cloud computing system, Amazon Web Services, a person with knowledge of the matter said.
As part of the pact, Anthropic agreed to build its AI using specialized computer chips designed by Amazon. If Anthropic becomes a success, Amazon's shares in the startup could pay off big time. In the meantime, the cloud computing deal will improve Amazon's bottom line.
The deal was structured as convertible notes, or debt that becomes equity when Anthropic reaches certain milestones, two people familiar with the structure said.
Amazon's funding of Anthropic reflected the way OpenAI raised money. In 2019, OpenAI raised $1 billion from Microsoft and spent most of the money buying computing power through Microsoft's Azure cloud service. Microsoft has since poured another $12 billion into the company, with OpenAI spending most of the money on Microsoft's cloud services.
(The Times has sued OpenAI and Microsoft for copyright infringement.)
Some investors have done so questioned such deals because companies like Google and Amazon invest money that ultimately increases their own revenues. The companies said the arrangements were kosher.
Google's investment in Anthropic is separate from the startup's agreement to use its cloud services, said Daniel Gabis, a Google spokesman. They have “always been separated,” he said.
Amazon appropriately accounts for all revenues and expenses, said Casey McGee, an Amazon spokesperson. “To suggest otherwise, or that AWS's agreement with Anthropic is anything but a normal business arrangement, is completely false,” he said.
Even after Anthropic raised billions from Amazon and Google, it knew it would eventually need more money. Generative AI startups are constantly updating, refining, and expanding their technology to make their product accurate, up-to-date, and more powerful, and that requires massive amounts of expensive computing power.
Finding new investors was easy for Anthropic. But many interested parties wanted to invest between $10 and $25 million, while the company was aiming for a much larger amount.
In November, Anthropic's head of business development Neerav Kingsland spoke at a conference hosted by Menlo Ventures, which had previously invested. Menlo proposed to lead Anthropic's next funding round, with a twist: What if the company brought all its small investors into one dedicated vehicle?
The arrangement would save Anthropic time and simplify the process. Mr. Kingsland and Anthropic's founders agreed, a person with knowledge of the talks said.
Anthropic told investors that $15 billion was the lowest valuation it would accept, two people familiar with the situation said.
After raising the $750 million this month, Anthropic is no longer conducting a formal fundraising process, a person familiar with the situation said. But investors may soon have another chance.
As part of FTX's bankruptcy proceedings this month, the crypto company asked the U.S. Bankruptcy Court in Delaware for permission to sell its 8 percent stake in Anthropic. FTX's lawyers said they wanted to move quickly to sell the shares alongside Anthropic's upcoming funding rounds.
FTX's understanding was that “Anthropic will continue to seek additional rounds of equity financing,” the lawyers wrote.