Written by Anna Tong and Crystal Ho
(Reuters) – U.S. startup Magic, which develops artificial intelligence models for writing software, is in talks to raise more than $200 million in a funding round that values it at about $1.5 billion, three sources told Reuters, just months after its latest capital raising.
Investors including Jane Street are expected to participate in the round, which could triple Magic’s valuation from its last round, despite generating no revenue and no product to sell, according to the people, who asked not to be identified discussing private matters.
The startup, which has about 20 employees, was valued at $500 million after its previous funding raise in February, according to PitchBook data. It has raised $140 million since its founding in 2022, from backers including Nat Friedman and Daniel Gross’ NFDG Ventures, as well as Alphabet (NASDAQ:) CapitalG.
Magic declined to comment, and Jane Street did not respond to a request for comment.
Magic’s new round is the latest fundraising push into one of the most promising applications of generative AI. Software developers represent a significant cost to tech companies, and tools that can generate code or help developers code more efficiently are very attractive.
Microsoft’s early success on GitHub has galvanized investors. In April, coding assistant startup Augment raised $252 million, while Cognition, the developer of the AI-powered Devin coding assistant, raised $175 million in a round led by Founders Fund at a valuation of $2 billion.
Investors say they see the success of GitHub Copilot as evidence of how big the market is. GitHub reported a 40% year-over-year revenue increase in the last quarter, driven by Copilot, which has 1.3 million paid subscribers.
“Microsoft’s (NASDAQ:) success has validated the commercial market for AI programming assistants, leading everyone to believe that there is a clear market demand and a willingness for customers to pay for the right product. The opportunity is huge, and there are likely to be multiple winners in this category,” said Brian Dudley, partner at Adams Street Partners.
While commercially available products like GitHub Copilot or OpenAI’s ChatGPT can suggest how to complete lines of code, the next frontier for programming assistants is to design and write entire software applications without human assistance.
Magic and a handful of other startups are trying to achieve this goal by training their large language models to perform specific coding tasks. However, this effort requires huge costs for data, chips, and electricity.
Magic plans to spend its funding on improving its own models that support long context windows, which refers to AI systems that can process more data in a single query, the sources added.
Magic’s ability to understand and process a large amount of context at once is due to an innovative design that goes beyond the traditional “transformer model” typically used in large language models like OpenAI’s GPT, according to one source.
In June, Poolside AI, a Paris-based startup with a similar approach to Magic, said it was in talks to raise $450 million at a $2 billion valuation. Poolside’s products are not commercially available.