(Bloomberg) -- HeyGen, an artificial intelligence startup that lets users quickly create realistic-looking avatars, has raised $60 million in a funding round that values the company at $500 million.The financing, set to be announced on Thursday, was led by Benchmark with participation from investors such as Conviction and Thrive Capital. The funding amount was previously reported by The Information. To date, the startup has raised a total of $74 million.

Founded in 2020, HeyGen is one of a growing number of startups aiming to make it cheaper and easier to create videos with generative AI. Using HeyGen, anyone can make a photorealistic avatar that can speak in their own voice and translate their words into a range of languages.The rapid advancement in AI video generation tools has heightened fears about enabling a new crop of convincing deepfakes, as these services have become increasingly capable, cheap and generally accessible. But there is also significant demand from businesses to experiment with the technology. HeyGen has been used by nonprofits and corporate customers to create internal training videos, ad campaigns and visual chatbots that people can engage with in real time.In June, McDonald’s Corp. turned to HeyGen to promote its Grandma McFlurry dessert. Customers were invited to record a video message to their grandmothers that could then be translated into her native language while retaining the grandchild’s own voice. During the process, the website also suggested users buy a McFlurry: “Grandma would want you to have one.”“People love video, but people also hate being on camera or don’t have time to be on camera,” Joshua Xu, HeyGen’s co-founder and chief executive officer, told Bloomberg News. “I thought if we could remove the camera, we’ll remove the barrier for visual storytelling.”

Xu is leading by example. On HeyGen, his is the first face users will see. In one of several demos on the site, users can type or speak requests and get an immediate response from an AI version of Xu. Any time a customer submits a form to the company, they also receive a personalized video message from Xu’s avatar letting them know they can expect a response within 24 hours.

“My take is that me, myself, as a founder, should be the person who understands this the best in the world,” he said, while also assuring me I was speaking to the real Xu and not his avatar. “So I just put myself out there.”To create an avatar, a user must submit a video of themselves that the company’s AI model can train on. Once the avatar has been generated, users can type in a script and pick a template to make a video. The company uses software from startups such as OpenAI to generate text. It also uses technology from OpenAI and voice-cloning startup ElevenLabs to generate voices.The company said it has snagged more than 40,000 paying customers, and over the past year grew annualized recurring revenue from nothing to more than $35 million. The company, which offers free services and paid subscriptions starting at $24 per month, has been profitable since the second quarter of 2023.

China ties and deepfakes

While HeyGen has figured out how to make money from generative AI — no small feat in the industry — it’s confronting other challenges. HeyGen has been scrutinized by lawmakers for its early connection to China, at a time when the US is focused on national security risks from China developing cutting-edge AI systems.

Xu and co-founder Wayne Liang met as college students in China. They came to the US to attend Carnegie Mellon University for masters' degrees and subsequently got tech jobs in California. HeyGen has been based in Los Angeles since 2022, Xu said. But Xu launched the startup in 2020 while he was in China, having traveled there for a trip only to be stuck in the country due to pandemic lockdowns.Early investors in HeyGen, previously known as Surreal, included HongShan, formerly known as Sequoia China. Xu said China-based investors have very little stake in the company today. He also said HongShan gave up a board seat in November when HeyGen received funding led by Conviction, a detail previously reported by Forbes. The company’s data is hosted in Ohio, he said, and HeyGen’s software is not available in China.

“I think it’s disappointing to see that my Chinese heritage is treated as something for me to be ashamed of,” Xu said. “While there’s understandable concern at the political level between the US and China, that has no more to do with my company than a company founded by Americans, Canadians or the British.”With HeyGen’s fast growth, there are also concerns about how its technology could be used.“We have to acknowledge that small-scale fraud, large-scale fraud, disinformation campaigns, extortion campaigns, election interference — those are happening with exactly the same technologies,” said Hany Farid, a professor at the University of California, Berkeley, who specializes in misinformation and deepfakes.Xu said the company requires people to give verbal consent, along with a spoken password, when they submit a video to make an avatar of themselves. This is intended to prevent people from making avatars of others. The company also has human moderators to block people from using avatars to make inappropriate content that could be used for bullying, harassment and disinformation.

The McDonald’s campaign, which was made by IW Group Agency, hinted at these restrictions. “Be good for grandma!” the campaign’s website warned. “Like grandma says, if you don't have anything nice to say, don't say anything at all.”

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