Alphabet's Google is said to be in talks to invest hundreds of millions of dollars in Character.AI, an artificial intelligence chatbot startup. This move comes as Character.AI seeks additional funding for model training and to address rising user demand, according to two informed sources cited by Reuters.

According to a third source, the potential investment could be in the form of convertible notes. This investment is anticipated to enhance the existing partnership between Google and Character.AI, where the startup currently utilizes Google's cloud services and Tensor Processing Units (TPUs) for training its models.

Google and Character.AI declined to comment in response to requests for statements.

Established by ex-Google employees Noam Shazeer and Daniel De Freitas, Character.AI provides a platform for users to engage in conversations with virtual representations of celebrities such as Billie Eilish or anime characters. Additionally, users have the ability to craft their own chatbots and AI assistants. While the service is free, Character.AI also offers a subscription model, charging $9.99 per month for users who wish to bypass virtual queues and gain expedited access to chatbots.

Character.AI's array of chatbots, featuring diverse roles and tones for users to select, has resonated notably with individuals aged 18 to 24, constituting approximately 60% of its website traffic, as per Similarweb data. This demographic focus allows the company to carve out a niche as a provider of entertaining and enjoyable personal AI companions, distinguishing itself from other AI chatbots such as OpenAI's ChatGPT and Google's Bard.

Character.AI is also reportedly in discussions to secure equity funding from venture capital investors, potentially leading to a valuation exceeding $5 billion. In March, the company successfully raised $150 million in a funding round led by Andreessen Horowitz, valuing it at $1 billion.

While negotiations with Google are ongoing, the terms of the deal remain subject to change, as stated by the anonymous sources due to the private nature of the discussions. Google has been actively investing in AI startups, allocating $2 billion to model maker Anthropic in the form of convertible notes, in addition to its previous equity investment. Anthropic utilizes Google's cloud services and the latest iteration of Tensor Processing Units (TPUs).

This aligns with a broader trend where major tech companies providing cloud services strike deals with AI firms to encourage their use of specific cloud infrastructure or hardware. Notable examples include Microsoft's investments in OpenAI, and Google and Amazon's support for Anthropic.

Concerns about potential anti-competitive practices in the field have prompted the U.S. Federal Trade Commission, led by Chair Lina Khan, to investigate cloud providers' investments in AI startups. Khan stated during an event in San Francisco that the agency is scrutinizing these investments to assess any anti-competitive behaviors.