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Microsoft recently acquired Inflection for $650 million, an AI startup founded by Mustafa Suleyman, former head of applied AI at DeepMind, an AI company acquired by Google.

Acquire might be the wrong way to describe this deal though. Technically, Microsoft is licensing Inflection’s software for $650 million while the company hired nearly all of Inflection’s staff. Inflection, in turn, is using that money to pay a “positive” return to investors. I use quotes because positive here is a technicality. I explain more in the AInsights below.

Mustafa Suleyman now becomes CEO of Microsoft AI, filling the void between Satya Nadella’s hands-on role in leading Microsoft’s ambitious AI strategy.

In this role, he will be leading all of Microsoft’s consumer AI products and research, including the Copilot generative AI service, as well as the Bing search engine and Edge browser. uleyman will also be overseeing the integration of AI models and technology from his previous company, Inflection AI, which Microsoft has acquired.Additionally, Karén Simonyan, the chief scientist at Inflection AI, will be joining Microsoft as the chief scientist for the new Microsoft AI division.

Inflection AI’s software and AI models are primarily used for two key purposes:

1) Powering its consumer AI assistant called Pi chatbot: Pi is a conversational AI assistant designed to be a “kind and supportive companion” for users (unlike the ironic robotic chatbots largely deployed today). It uses Inflection’s large language models to engage in open-ended dialogue, provide information, and offer emotional support.

Interestingly, Pi has around 1 million daily active users and 6 million monthly active users as of early 2024. 1

2) Licensing to enterprise customers: After struggling to monetize Pi, Inflection is now pivoting to an enterprise focus by licensing its AI models and technology to businesses. The company developed a “Conversational API” to allow companies to integrate Inflection’s language models into their own applications and services.

This is where Microsoft is going. Inflection’s Pi virtual assistant provides an AI model licensing/integration platform for enterprise customers through its Conversational API.

AInsights #1: This is not the usual way of making an acquisition or even an aquirehire. In June 2023, the WSJ reported that Inflection AI raised $1.3 billion in funding from tech veterans Bill Gates, Eric Schmidt, and Reid Hoffman, along with Microsoft and Nvidia. This round contributed to the venture’s total funding of $1.5 billion at a $4 billion valuation. $650 million isn’t close. Investors aren’t in this business. They don’t seek losses or less than exponential returns.

In reality, Inflection struggled to establish a viable business model for its consumer AI offerings like the Pi chatbot. By accepting this licensing deal, Inflection could provide a 1.5x return to investors rather than pursuing a full acquisition at the elevated valuation.

The unconventional arrangement allowed Microsoft to acquire Inflection’s AI talent and models without an outright acquisition, while Inflection pivots to an enterprise focus under new leadership. This might set a new precedent for future tech “acquisitions.”

The Information founder Jessica Lessin  reported it this way, “This is the new way the Magnificent Seven [tech stocks] are going to do acquisitions, you get the [intellectual property] and team without FTC scrutiny or approval.”

AInsights #2: The new division will be responsible for all of Microsoft’s consumer-focused AI products and research, with the goal of bringing cutting-edge AI capabilities to Microsoft’s consumer offerings. This includes expanding and improving Microsoft’s existing consumer AI services like Copilot, Bing, and Edge, as well as potentially developing new consumer-facing AI applications and experiences.

Inflection AI is pivoting away from its consumer-facing chatbot “Pi” and instead focusing on licensing its AI models and technology to enterprise customers. This means business customers will have more opportunities to integrate Inflection’s advanced conversational AI capabilities into their own products and services.

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