Runway Just Netted $100 Million and a Big Valuation from Google and Others
The cloud wars are spilling over into generative AI investment and competition
Insider reported this week that the generative AI video app Runway closed a $100 million funding round at a $1.5 billion valuation. The Information added that Google is a key investor in the round.
The investment, part of a roughly $100 million funding round, underscores the fierce competition among cloud providers to get close to companies with cutting-edge AI services that could become major cloud customers or acquisition targets in the future.
There are many layers to this news. When Google, Microsoft, or Amazon invest in a start-up, they bring the company into their cloud computing ecosystem and other services.
1. What is Driving Valuations?
The eye-popping valuation for the mobile app company founded in 2018 shows how investors are treating break-out hits. Runway has been used to produce a number of viral hits for consumer user-generated content, and looks like it may become a mainstay in synthetic media production.
“Runway is an applied AI research company shaping the next era of art, entertainment and human creativity,” according to the company. It employs third-party models such as Stable Diffusion and has in-house AI models and tools.
Note that this is an entirely different economic model than large language model (LLM) and text-to-image providers such as Anthropic and Stability AI. Investors are betting that Runway can emerge as a subscription-based business-to-consumer (B2C) success story with the potential business-to-business customers. The other companies represent business-to-business (B2B) focused products.
The investment thesis is simple. Generative AI looks destined to become a very large market, and a few “winners” in each product category are likely to command outsized market share. In addition, consumers and businesses have demonstrated a willingness to pay for access to generative AI tools. While revenue may be small today, it can grow quickly for companies that dominate a market segment.
This is particularly true when base monthly subscriptions have caps based on volume and add charges beyond certain usage thresholds. That approach is common across generative AI applications because each incremental request to the models carries a material cost.
2. What Google Gets Immediately
The presence of Google in the deal has at least two angles. From a short-term perspective, Google has been investing in generative AI companies using a mix of cash and cloud computing credits. LLM providers such as Anthropic have large cloud computing bills to pay for training AI models and conducting user inference. Google has reportedly put $400 million into Anthropic. Some people see this as Google “buying a customer.” According to The Information, “Google Cloud said in February it had become Anthropic’s ‘preferred’ provider” at the time of its $300 million investment.
Surprisingly, this announcement comes just a few weeks after Amazon highlighted Runway’s use of AWS cloud computing. It appears that Google has “invested” in Runway and likely stolen a key customer from a rival cloud service provider.
3. What Google Gets for the Future
In addition, Google’s investments in high-profile generative AI startups potentially offer the “option value” of acquiring a controlling interest in the company in the future. As a key investor, Google will have more insight into the companies’ operations and may be tipped off when rival companies want to invest or acquire.
Microsoft successfully used this strategy through an early $1 billion investment in OpenAI. Earlier this year, Microsoft acquired 49% of OpenAI, giving it the largest ownership stake in the clear leader in generative AI commercialization. Much of this year’s reported $10 billion investment was in Azure cloud computing credit.
Google, long thought to lead the generative AI race, is suddenly in catch-up mode against key rivals. Given the situation, you can see the logic of Google’s investments in Anthropic and Runway. Moreover, because some of the investment is through Cloud services on infrastructure Google already owns, the high valuations may come at a de facto discount.
