Racing to the Turn

On Inflection AI and an end to all things

Author

Ate A Pi
March 19, 2024

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Here’s today at a glance:

⏭️ Coda to Inflection

Dramatic news, Inflection AI’s co-founders leave to join Microsoft. Inflection is the creator of the Pi chatbot. Pi had attitude.

Inflection 2.5, released on March 7th, just 12 days ago, had “near GPT-4“ performance, at only 40% of the training compute:

This was 3 days after the Anthropic’s Claude 3 release on March 4th. Claude, of course, puts Inflection to shame. Inflection was forced to rush out a release that had not yet crossed the GPT-4 benchmark.

Inflection had just raised $1.3 billion in June 2023.

  • Early 2022 - raised $225 million from Greylock, Reid Hoffmann and Microsoft

  • June 2023 - raise $1.3 billion from Reid Hoffmann, Microsoft, Nvidia, Bill Gates, and former Google CEO Eric Schmidt, in a mix of cash and cloud credits. Promises to build 22,000 H100 cluster.

What happened?

  • Inflection was run over because it was undersized. Given more time and money, it probably could have attracted the talent necessary.. but the market had moved too quickly. They were never going to get the lead again

  • They were primarily a Reid Hoffmann/Microsoft incubated venture. Reid also sits on the Microsoft board and sold LinkedIn to them.

  • There was no real skin in the game from the investors. Greylock is controlled by Reid, Microsoft and Nvidia both invested with the expectation that they would sell cloud credits and GPUs.

  • 22,000 H100 x $30,000 = $660 million, assuming Nvidia contributed half the second round of funding, then MSFT cloud credits.. as little as 250 million may have been the actual cash into the firm.

  • The recently announced Nvidia B100s are at least 8x (30x in marketing copy) more performant at 50%-100%(?) more price, so call that 4x more FLOPs per dollar. So there is a small window of time in which they can still utilize their GPUs and get maximum cash flow out of them. This makes sense for Microsoft

Deal Structure

Fascinating:

  • Mustafa and Karen, the 2 co-founders, join MSFT as employees

  • New CEO brought in to run Inflection

  • It’s basically an earn-out over time for the investors

  • For staff, they get retention contracts at MSFT

  • Graceful, engineered soft landing

Why didn’t MSFT just buy them outright?

  • $4 billion might have been too hefty a price for the level of tech they’ve proven so far

  • Antitrust and optics concerns for MSFT

Why did the other investors agree to it?

  • Are there any real money investors in there? Everyone is a strategic or related party. I’m even wondering if Nvidia gets to reclaim its chips.

  • If there are, maybe Reid offered them a favor in his next big deal?

I got lots of queries on the earnout. Reid clarified on LinkedIn several hours later…

This agreement with Microsoft means that all of Inflection’s investors will have a good outcome today, and I anticipate good future upside.

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🗞️ Things Happen

  • Nvidia makes a broad push into creating a foundation model for humanoid robotics. It’s amazing to watch them push the envelope into areas that are going to require so much more compute.

🖼️ AI Artwork Of The Day

Breaking Bad Ghibli - u/Armand_Roulinn from r/midjourney

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