AI Startup Scale Offered Funding at $3 Billion Valuation

Alexandr Wang, Scale AI Co-Founder and CEO. Photo by Bloomberg

Scale AI, a startup that helps companies such as Lyft, Toyota and DoorDash train artificial intelligence systems to recognize objects and analyze written documents, could soar past a $3 billion valuation with a new financing, according to two people familiar with the matter.

The San Francisco–based company has received an offer of investment from Tiger Global Management valuing Scale at $3.2 billion pre-money, or triple its prior valuation, according to one of these people. It’s unclear whether Scale, which is led by 23-year-old CEO Alexandr Wang, has accepted Tiger’s offer or whether it has chosen another growth-stage backer to lead the financing. If the deal closes, it would add to a string of high-valuation investments for young startups amid record levels of VC fundraising.

THE TAKEAWAY
Scale AI, a four-year-old artificial intelligence startup, has received a funding offer from Tiger Global that would triple its valuation, a reflection of the intense investor demand for fast-growing tech companies.

The funding discussions follow its success securing a nearly $91 million contract from the U.S. Army to help “experiment, develop and iterate on high-quality annotated datasets” for AI and machine learning, the U.S. Department of Defense said Sept. 29. The contract, the first of its kind for Scale, may open the door to further lucrative partnerships within the defense industry.

Scale and Tiger Global did not respond to requests for comment.

Founded in 2016, Scale sells access to software that places digital labels or boxes on imagery collected by companies developing self-driving–car prototypes, drones and other robots. The marked-up data makes it easier for those customers to train the robots to better recognize objects and operate autonomously. Scale hires contractors to put labels on the data, but it is also trying to automate the data-labeling process.

As of August, Scale was on track to generate about $80 million in annualized revenue, The Information previously reported. That’s up from a pace of about $40 million in the middle of 2019 and $4 million the year prior. The company’s growth, coupled with its Defense Department contract, has fueled interest in its latest financing, said one person.

If Scale accepts a $3.2 billion pre-money valuation (the value of a company not including the new capital raised), that figure would be higher than the public market valuation of one of Scale’s main rivals, Appen. The Australia-based company has a market capitalization of $3.1 billion and generated about $220 million in the first half of this year, up 25% from a year earlier, while operating profitably before interest, taxes, depreciation and amortization.

The decision to take on new funding could also indicate a shift in strategy for Scale’s CEO. Scale in August 2019 raised $100 million in a deal led by Peter Thiel’s Founders Fund. Wang said the round, which cemented Scale’s unicorn status with a valuation of $1 billion, would ideally be its last private capital raise, TechCrunch reported. Altogether, Scale has raised $123 million in VC funding from investors including Index Ventures, Accel and Coatue Management.

High inflows into venture capital this year have helped startups raise money sooner than their founders anticipated, sometimes with valuations 100 times higher than their revenues. With $60 billion in new capital to deploy, U.S. VC firms have been competing for access to top deals in tech companies, in many cases preempting deals or offering a startup a check before it has formally sought investment.

The success of recent tech initial public offerings, including those of cloud computing company Snowflake and Palantir, a big-data analytics company that sells software to the U.S. military, has further heightened investor interest in the sector.

Investors have backed dozens of startups developing or enabling AI for business customers in the past few years. Among them, Scale has made one of the swiftest ascents.

Four years ago, when he was 19, Wang dropped out of the Massachusetts Institute of Technology to found the company with Lucy Guo, now 26. The company launched after it completed the Y Combinator startup accelerator that same year.

The business has grown rapidly thanks to demand for its technology, which got its start by helping developers train their computer vision algorithms to identify objects on the road. It has previously done work for self-driving–car companies including Alphabet’s Waymo, Uber, and General Motors’ Cruise. As of last year it employed about 100 people.

In August, Scale hired Brad Porter, an experienced robotics engineer, as its first chief technology officer. Porter spent nearly 14 years at Amazon, where he oversaw some 200,000 robots’ handling of the company’s warehouse and distribution infrastructure.

Guo, who left Scale in 2018, now manages an early-stage VC fund, Backend Capital, which invests in engineers starting technology companies.

In the long term, Scale says it wants to help machine-learning researchers train their computer vision algorithms for a wider range of uses. Scale has been attracting customers in the retail, food delivery and micromobility sectors. These include Standard Cognition, which develops software to power cashier-free checkout, and electric scooter company Skip, which uses the technology to stay compliant with city parking regulations.

Businesses are also using a new Scale product, Nucleus, to directly improve their machine-learning systems. Nucleus helps customers figure out which sets of data they need to analyze in order to improve those systems and which ones they don’t, and it tells them whether the accuracy of their systems is good or not. This year, Scale also has helped food-delivery apps such as DoorDash, whose business has grown amid the pandemic, analyze restaurant menus in order to incorporate food items quickly in a standardized format.

— Amir Efrati contributed to this article.

Reporter at TechCrunch covering venture capital. She’s interested in diversity & inclusion, e-commerce, transportation and more.