The deal is one of several challenges facing the $7.3 billion AI startup’s federal operations, with CEO Alexander Wang warning of U.S. national security concerns amid threats from China. began to openly advocate. One expert described the optics as “terrible.”
by david jeans and Kenrick KaiForbes staff
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In the fall of 2022, Scale AI CEO Alexandr Wang saw a huge opportunity. That’s his deal with TikTok, where his $7.3 billion AI data labeling company will provide insights to the social media giant’s advertisers. Although the initial pilot was worth less than $1 million, Mr. Wang believed the profits from a larger deal could be huge, a source with knowledge of the matter said. I remembered what he said.
But when Mr. Wang pushed through with the deal, members of Scale’s leadership panicked, three people with direct knowledge of the matter said. forbes. Just two years ago, former President Donald Trump announced plans to ban TikTok, claiming that the app owned by Chinese company ByteDance posed a threat to U.S. national security. And TikTok is the subject of an ongoing national security review inspired by concerns that U.S. user data could be accessed by the Chinese Communist Party (TikTok denies this claim ).
It didn’t look very good. Some executives also said they were concerned that the deal with TikTok could jeopardize future government business. But Mr. Wang, then 25 years old and who has publicly declared that beating China in the AI race is a matter of national security and has loudly touted himself as a leader in defense technology, remained undeterred. “The business opportunity was too good.” Rejected. He pushed it through despite their objections.
“Strategically, both from a perception issue and a security perspective,” any deal between a U.S. defense contractor and TikTok would be a “bad decision.”
“Alex is a lot of things. National security experts are not among them,” said a former Scale federal team official who requested anonymity for fear of retaliation from Scale. forbes. “He ignored our concerns and said we needed to focus on the long-term goals of both sides of the company, and the deal with TikTok would help with that.”
But when forbes TikTok’s parent company ByteDance has released the app’s location data ( forbes (Journalists were also targeted, and the matter is currently being investigated by the FBI and Justice Department), Mr. Scales reconsidered the deal.the company said forbes Negotiations with TikTok ended less than a month after the partnership began.
“It’s a strategically wrong decision, both from a perception issue and from a security perspective,” said Bill Evanina, former director of the U.S. government’s National Counterintelligence and Security Center. forbes, which can be said generally about deals between defense contractors and TikTok. “But at the end of the day, if we partner with ByteDance, we could be making 10 times the money we’re making at the Department of Defense. So I’m sure some people will say it was a better business decision.” There will be. But in the bigger picture, there won’t be that many.”
The reputation and perception of doing this “can be scary,” Evanina said. “In fact, I think they could have avoided the disaster by withdrawing from the agreement.”
TikTok’s reversal of scale reflects efforts by some company executives to build government and military businesses, an effort that Mr. Wang himself has made a priority, according to internal communications and interviews with 11 former employees and industry officials. It was one of a number of issues that he feared would undermine the company’s development.
In an interview with forbesJohn Brennan, Scale’s public sector general manager, said the company does not currently have a contract with TikTok. “There was no data or money exchanged with TikTok,” Wang said. Both men highlighted Scale’s commitment to national security and safety, and Wang touted the Department of Defense’s interim authorization allowing access to unclassified data and ensuring the company’s AI is safe and secure. It is one of seven companies that signed on to the Biden-Harris administration’s voluntary initiative to do so. Safe.
TikTok declined to comment.
Want to learn more about Scale AI and other defense contractors? Contact reporters David Jean at djeans@forbes.com or Signal 347-559-5443 or Kenrick Cai at kcai@forbes.com or Signal 415-570-9972 Please contact me.
Scale, which uses human labor to label data used to train AI and is expanding into other data analysis services, began working with governments in 2020. Wang previously spoke about his original vision for the company’s new defense division. forbes, It all started in part during a 2018 trip to China, where he toured the offices of TikTok’s parent company ByteDance and other technology companies. He was impressed with the AI they were developing, but was concerned that it could pose a threat to American leaders. “It was obvious it wasn’t going to help anything, and it was really scary,” he said.
The startup is now one of the few technology companies like Palantir and Anduril to be one of the most vocal advocates for defense contracts. Lobbying disclosures show Scale spent $1.95 million on federal lobbying from 2020 to the end of the third quarter of 2023 and generated $90 million in government contracts over the same period, procurement records show. (This number also includes potential nondisclosure agreements, which is not the case). By 2023, the number of employees working in Scale’s public sector operations will have increased to more than 100, the company said. Brennan said. forbes The scale company currently has 20 active government contracts.
As the government’s business expands, federal team leaders had concerns beyond the TikTok contract.
Scale’s defense division still pales in comparison to its commercial business, which will bring the company $750 million in annualized revenue in the second half of 2023 and 2022, according to two people familiar with the matter. That’s up from an initial figure of about $250 million. AI companies are seeing a surge in demand for reinforcement learning with human feedback (RLHF), a method for data labeling large-scale language models. To date, the company has raised $600 million from blue-chip investors including Accel and Index Ventures. (Accel and Index, who sit on Scale’s board of directors, declined to comment.)
But as the government’s business expanded, federal team leaders had concerns that went beyond the TikTok contract. Three sources said military officials twice complained about what Scale’s management considered exaggerations about the company’s cooperation with the government and its capabilities. Last year, the company announced the launch of a national security-focused product, a platform called Donovan that adapts large-scale language models (LLMs), such as OpenAI’s GPT-3.5, for sensitive information. Scale said in a press release that Donovan will be deployed in a “critical application” for the Army’s 18th Airborne Corps to “help military staff understand growing amounts of data in minutes, without any training or coding experience.” We will provide support so that they can be sorted out.” “The ordering cycle for air missions currently takes three days, but Mr. Donovan can reduce the duration of that cycle to a few hours,” the company said.
After the release was announced, Col. Joe O’Callaghan told Scale executives that the company was exaggerating the nature of the partnership, multiple sources with knowledge of the matter said. forbes. They said Mr. Scales did not have access to the 18th Airborne Division’s air mission orders at the time, and Mr. Donovan had not received the green light for any “critical use cases.” Brennan said Scale stands by its press release and could not comment on the terms of the agreement.
Months later, during a pitch meeting with another Army unit, U.S. Central Command, the unit’s leader, Gen. Michael Kurilla, said Donovan was fired after seeing a live demonstration, according to two people familiar with the matter. The company reportedly told Wang that it was not ready for production. Brennan said Kurilla “didn’t say that to us.” Wang said Donovan is “currently used by more than 80 government agencies.” Two people involved said. forbes As of late 2023, trials and pilots accounted for the majority of Donovan’s usage, but Scale said it was having trouble converting them into full-scale contracts.
The company did not respond to questions about whether this number includes organizations that have signed up for the free trials that Scale advertises on its website.
The Pentagon did not respond to questions about the 18th Airborne Corps or U.S. Central Command.
Wang on the cover forbes He was named to Enterprise Tech’s “30 Under 30” list in 2018, but he expected government contracts to be a cakewalk, three former employees said. In 2020, Scale signed its first contract with the Department of Defense. The negotiations were straightforward, with potential profits of about $100 million over four years promised, according to government procurement records. Records show he has paid nearly $80 million to date.
Scale’s ability to secure the contract was due to the Department of Defense entering the market for a new data labeling vendor for Project Maven. The project was the same AI initiative that Google employees protested two years ago because the company’s technology was being used to analyze drone attacks. picture. The Pentagon had asked Scale to apply for the contract, according to people familiar with the matter.
A person familiar with the matter said the government “worked with Scale throughout the process to secure the contract and ensure that Scale was in a competitive position.” “That got Alex’s mind thinking about what it’s really like to work with the government.”
Brennan declined to comment on Project Maven, citing publicity clauses that prevent him from discussing specific government contracts. The Department of Defense complies with acquisition and contracting regulations, spokeswoman Sue Goff said. She declined to comment on the Project Maven negotiations.
Scale has not publicly discussed the Project Maven deal, but in January 2022, when the company advertised a $249 million award for the development and “end-to-end” delivery of test and evaluation tools. The first major defense announcements highlighted the complexity of winning military contracts. provided AI solutions to the Department of Defense. However, the announcement was misleading and did not mention that 70 other companies were eligible to receive the same amount. To date, Scale has not received payment for that contract, according to government procurement records and confirmations from two company officials. Brennan said the company currently has multiple ongoing agreements under “multiple different contract vehicles.”
Scale’s defense business remains dependent on its original contract, Project Maven, which accounted for the majority of federal revenue as of 2023, three sources said. That contract is set to expire this spring, when the company will have to compete again. Brennan said. forbes Federal business revenue has increased 160% since 2021, he said, declining to comment on details of the contract with Scale, citing a non-disclosure agreement.
Serving the national security interests of the United States remains a priority for Mr. Wang. At an AI forum hosted by New York Sen. Chuck Schumer in December, he spoke again about his visit to China. He said, “When I came back, I knew I had to make it part of Scale’s mission to do the best I could.” I support America.”
Alexandra S. Levine contributed reporting.
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