Tech’s AI deals are leaving behind zombie companies, investors say

Jeff Wang got a big promotion last month. There were lots of tears, but not the happy kind.

The 39-year-old was unexpectedly named interim CEO of artificial intelligence coding startup Windsurf. The company had been in discussions with OpenAI about a potential acquisition that would have resulted in a handsome payday for many employees. But the talks fell apart and, on July 11, several founders and top researchers instead left to join Google as part of a $2.4 billion licensing deal.  

As one of the highest-ranking executives remaining at Windsurf, Wang was elevated to the top job, at least for the time being. His first order of business, he told CNBC, was to break the news at a tense all-hands meeting at the startup’s Silicon Valley headquarters.

“It was a very, very challenging day,” Wang said. “People were crying. It was very, very emotional. I was spending half the time calming down people, because they have families and they got nothing.”

Windsurf is part of a growing crop of AI startups whose founders and top researchers have been poached by megacaps like Meta, Google, Microsoft and Amazon through high-priced talent grabs that are helping the biggest companies skirt regulatory scrutiny. While the deals often produce big payouts for founders and AI leaders, they can leave investors, other employees and the remaining company in limbo.

Samir Kumar, a general partner at Touring Capital, said that what’s left is something resembling a zombie company.

“There’s a big question of what their future prospects are,” Kumar said. “Frankly, you hollowed out the organization.” 

The headline-grabbing deal came in June, when Meta rocked the tech industry by announcing a $14.3 billion investment in data labeling startup Scale AI. As part of the agreement, Meta took a 49% stake in the company, hired its CEO Alexandr Wang to lead a new superintelligence lab and said it would deepen the work it does with Scale.

A month later, Scale cut 200 full-time employees, or 14% of its staff. Meta’s investment had doubled Scale’s valuation from $14 billion last year. But that number only exists on paper.

Microsoft used a similar playbook in March 2024, when it hired Inflection AI’s co-founders and other staffers. Amazon has completed two such deals in the last year, nabbing the founders and top talent away from Adept in June 2024, and from Covariant two months later. Google inked a $2.7 billion licensing deal with Character.AI and hired its founders last August.

For Silicon Valley venture investors, long the lifeblood of risky tech startups, the system isn’t functioning as intended. Companies that would otherwise be on the path to a potential initial public offering or lucrative acquisition are getting pulled apart, with the bulk of the cash ending up in the pockets of the founders and their leading engineers.

“The money doesn’t flow as straightforwardly as it would in just a pure M&A transaction,” said Rob Toews, partner at Radical Ventures. 

The Scale deal was the exception as far as venture returns go, as Meta’s hefty cash investment resulted in big gains for early investors, most notably Accel.

Scale spokesperson Joe Osborne said the company is very much alive.

“Comparing Scale to these companies overlooks major differences in our revenue performance, company size, and deal structure,” Osborne said in a statement. He said Scale has more than 1,000 employees and generated close to $1 billion in revenue last year.

“Meta’s investment benefited our investors and employees, kept us independent, and positioned us for long-term success,” Osborne said.

VCs say one way to try and keep founders and early employees from bailing is through secondary offerings, allowing them to sell a piece of their ownership to investors so they can buy a house, repay debt or just lock in some gains.

But secondary sales can’t compete with the kinds of offers coming from deep-pocketed tech companies that are flinging open their wallets to win the AI battle. Tech investors and startup employees who spoke to CNBC said it’s a trend that threatens to thwart innovation as founders abandon their ambitious projects to work for the biggest companies in the world.

“This is not business as usual,” said Tom Chavez, co-founder of the startup studio Superset. “This is a disruption.”