From Viral App to Generative AI Darling. Runway Lands $141 Million in Funding.

Same valuation 6 months later. Hmmm.....

Runway, the text-to-video creator app, has announced a $141 million “extension” to its December 2022 Series C funding round. Google, NVIDIA, and Salesforce Ventures participated in the round. The December round netted Runway $50 million, so the Series C financing now totals $191 million. Total funding for the company since its founding in 2018 is $236.5 million, according to Crunchbase.

Cris Valenzuela, Runway’s CEO, told TechCrunch in an email interview that:

Runway’s customer base now spans Fortune 500 and Global 2000 companies, including New Balance and “millions” of individual creators.

…

“Content creation today is very expensive and time consuming,” Valenzuela added. “We want to help bring those cost and time factors as close to zero as possible, especially as companies’ content needs are only increasing . . . [Our goal is to] reimagine content creation and [build] a new type of creative suite, the generative suite.”

Related to the $100 Million Funding Story

It is worth clarifying that the $100 million funding that leaked through Insider and The Information in late May reflected part of this $141 million extension. The Information cited Google as an investor, and it may be the largest for this round.

Granted, the new funding is said by some sources to come with obligations by Runway to begin using Google Cloud computing services. Cloud server expenses are typically the largest cost item for generative AI companies, so Google and other cloud providers can use those capabilities as currency during investing rounds. It is also an incentive for cloud providers to invest if it means they can secure long-term business from a successful generative AI company.

This is considered one of the early motivations behind Microsoft’s OpenAI investment. It also may have driven Microsoft’s reported $10 billion investment in OpenAI earlier this year, which was followed by the introduction of Azure OpenAI Services.

A Runway Valuation Stagnation?

Another interesting element of this story that seems to have gone unnoticed is the valuation has not changed in the past six months. The new valuation is believed to be $1.5 billion. Runway extended similar valuation terms to new investors as those in the round announced in December 2022. Why?

The funding round announced on December 5th was committed in October or November of 2022. That was after the frenzy around DALL-E, Midjourney and Stable Diffusion but before ChatGPT. Nearly every generative AI company has experienced a valuation markup since the ChatGPT moment. Why is Runway offering the same terms to Google, NVIDIA, and Salesforce now? Why are existing investors okay with this?

Making room for “strategic” investors like the tech giants included in the recent announcement is not unusual. However, it is not common for an extension to be three times as large as the original round six months later.

In addition, Runway revealed in the email to TechCrunch that it has millions of creators and New Balance as customers. Runway offers a free version of the app, so millions of “creators” using a free app are not proof of success. It may be proof of awareness, but it is not an indicator of a large cohort of loyal paid users.

New Balance is a relatively well-known athletic brand, best known for running shoes and accessories. However, it is not what you would call a top brand. If the company is doing so well, you would expect it to have other well-known brands to mention.

Catching Up to High Valuations

This situation leads me to believe that Runway is growing into its earlier valuation, which was driven by a strong interest in the text-to-image market. It is not getting a post-ChatGPT generative AI pop. We may also assume that existing investors acquiesced to significant dilution in their equity ownership due to the round and that this funding was necessary to avoid a down-round with a lower valuation.

If true, Runway will not be alone for long in the flat to down round club. The sky-high valuations for several generative AI startups will necessitate valuation adjustments if they need access to new capital.

And Runway may still become a giant in the generative AI and synthetic media market segments. Surely Google, NVIDIA, and Salesforce see the potential for this outcome.