Microsoft bets on start-ups to extend AI lead with hiring of Inflection chief

Microsoft chief Satya Nadella’s bet on ChatGPT maker OpenAI gave the tech giant early ascendancy in the race to commercialise generative artificial intelligence. He has looked again at a start-up to extend that advantage.

On Tuesday, Nadella announced the surprise hiring of Mustafa Suleyman, chief executive of AI start-up Inflection and co-founder of DeepMind, to lead a new Microsoft division focused on pushing further into the market for consumer-facing AI applications.

Suleyman, who will report directly to Nadella and moves with most of Inflection’s 70 staff, is now tasked with growing products such as Microsoft’s Copilot assistant and Bing search engine, which the company hopes will complement its more established AI offerings to businesses.

As with Microsoft’s $13bn investment in OpenAI, an Inflection rival, Tuesday’s agreement is not an acquisition, but a strategic move to bring some of the most prominent names in AI into Microsoft’s orbit.

“There’s not a list of more than 20 people that could do [Suleyman’s new] job,” said Aaron Levie, chief of cloud company Box, adding that Microsoft’s lead in generative AI had been driven by Nadella identifying the “right people” at the “right time”.

Michael Walker, a portfolio manager at AllianceBernstein, said part of Nadella’s “genius” was understanding that “truly breakthrough innovations rarely happen inside big companies, they come from start-ups”.

Big Tech rivals are vying to define the emerging worlds of enterprise and consumer AI apps, as they look to the technology as a catalyst for growth.

Apple is reportedly exploring a tie-up with Google that would inject AI into the iPhone maker’s products, while a string of software companies are racing to roll out apps such as the conversational search engine run by Perplexity, another much-hyped start-up.

Microsoft has sought to tie itself closely to promising fledging AI companies, including with a recent investment in French AI start-up Mistral. The approach has reaped early benefits with investors, as Microsoft surged past Apple this year to become the world’s most valuable listed company, with a market capitalisation of $3.13tn.

Despite not making full acquisitions, its dealings with start-ups are likely to attract the attention of regulators, according to analysts. Competition watchdogs in the US, UK and EU are already probing its multibillion-dollar alliance with OpenAI.

Tuesday’s hiring was “basically an acquisition of Inflection without having to go through regulatory approval”, wrote Tony Wang, managing partner at venture capital firm 500 Global.

Steven Weber, a professor and expert on technology and intellectual property at the University of California, Berkeley, noted the deal was similar to the offer Microsoft made to OpenAI employees after chief executive Sam Altman was temporarily sacked last year.

Microsoft and Inflection have stressed that the agreement is not an acquisition and that Inflection remains an independent company.

While Microsoft has emerged as a leading player in the market for enterprise generative AI — with its flagship Copilot AI assistants embedded into its suite of workplace applications such as Excel — it has been slower to roll out products targeted at millions of consumers.

One of Microsoft’s first major pushes in that direction was its Cortana voice assistant, which was discontinued. Although Nadella said last year that AI-enhanced Bing would disrupt internet search, the market continues to be dominated by Google.

Barring gaming, “a lot of the consumer segments of the business have not been as bright stars as their enterprise” segments, said Brent Thill, analyst at Jefferies.

Nevertheless, Nadella has said that conversational chatbots are “the new apps”, and investors added that a dual focus on enterprise and consumer was in Microsoft’s DNA.

The tech giant has set its sights on the “huge opportunity” for someone to create a broad-based AI assistant for consumers, said Soma Somasegar, a managing director at Madrona Venture Group.

Google had the opportunity to do so but had not “executed on it in a way that says they’re leading the pack”, which created a window for Microsoft to make a “bold bet”, said Somasegar.

Luring individuals to use new generative AI tools could also bolster Microsoft’s closely watched cloud computing division, since ChatGPT runs on its cloud platform.

Kevin Walkush, a portfolio manager at Jensen Investment Management, said the company had “established the strongest beachhead” in the market for AI workplace assistants, with the new target of getting people to install generative AI products on their phones representing a major “opportunity”.

However, Microsoft will have to compete with the likes of Apple and Google, both of which are racing to roll out their own generative AI products and have strong relationships with the millions of consumers that use their mobile platforms.

Inflection, meanwhile, will continue to operate under new chief executive Sean White, and pivot to providing its generative AI technology to businesses and developers, from a previous focus on its consumer chatbot Pi.

Inflection board member and co-founder Reid Hoffman said it was “a good day for everyone involved in Inflection AI” and that the company’s investors would see “good future upside”.

The change comes just months after the Palo Alto-based start-up raised $1.3bn from investors including Microsoft and Nvidia, but the talks with Microsoft occurred after the June fundraising announcement, according to two people familiar with the matter.

Nadella was “diversifying in a very credible way — not only the tech, but the execution and the people”, said Walkush “There’s something to be said for having fresh perspectives, an outsider, because AI is so new.”

Additional reporting by Richard Waters in San Francisco