The deal was one of several challenges facing the federal business of the $7.3 billion AI startup, whose CEO Alexandr Wang has become an outspoken advocate of American national security amid the threat of China. One expert called the optics “horrible.”
By David Jeans and Kenrick Cai, Forbes Staff
In the fall of 2022, Scale AI CEO Alexandr Wang saw a huge opportunity: a deal with TikTok where his $7.3 billion AI data-labeling company would provide insights for the social media giant’s advertisers. Though the initial pilot was worth less than $1 million, Wang was convinced the upside of a larger contract could be massive, sources in position to know recalled him saying.
But as Wang pushed the deal through, members of Scale’s leadership panicked, three people with direct knowledge of the matter told Forbes. Just two years earlier former President Donald Trump had announced plans to ban TikTok, arguing the app, which is owned by Chinese company ByteDance, posed a threat to U.S. national security. And TikTok remained the subject of an ongoing national security review inspired by fears that American user data could be accessed by the Chinese Communist Party (a claim TikTok has denied).
It wasn’t a great look. And some executives worried that a deal with TikTok might jeopardize future government business, the sources said. But the then 25-year-old Wang, who has said publicly that beating China in the AI race is a matter of national security and has loudly positioned himself as a leader in defense tech, wasn’t swayed: The commercial opportunity was too good to turn down. He pushed it through over their objections.
“Strategically, both from a perception issue and security perspective,” any deal between an American defense contractor and TikTok is a “bad decision.”
“Alex is a lot of things. A national security expert is not one of them,” a former Scale federal team employee, who requested anonymity for fear of retribution from the company, told Forbes. “He disregarded our concerns, and said he had to focus on the long term goals of both sides of the company — and the TikTok deal would help this.”
But when Forbes broke the news that TikTok parent company ByteDance had planned to surveil American citizens using the app’s geo-location data (a Forbes journalist was among its targets and the matter is now being investigated by the FBI and the DOJ), Scale reconsidered the deal. The company told Forbes it ended discussions with TikTok less than a month after the partnership began.
“Strategically, both from a perception issue and security perspective, bad decision,” Bill Evanina, former director of the U.S. government’s National Counterintelligence and Security Center, told Forbes, speaking generally about any deal between a defense contractor and TikTok. “But at the end of the day, when you partner with ByteDance, you might make 10X the money you’re making in the Department of Defense. So I’m sure there are people that’ll say it was a better business decision, but bigger picture, not so much.”
The reputational implications or optics of doing this would be “horrible,” Evanina said. “I think they averted a catastrophe, actually” by backing out of the deal.
Scale’s TikTok reversal was one of a number of issues that some company executives worried might undermine its efforts to build out a government and military business — efforts Wang himself has said are a priority — according to internal communications and interviews with 11 former employees and industry sources.
In interviews with Forbes, John Brennan, Scale’s general manager for public sector, said the company doesn’t currently have a contract with TikTok; Wang said “no data or money was ever exchanged with TikTok.” Both stressed Scale’s commitment to national security and safety, with Wang touting a provisional DoD clearance that allows it access to unclassified data and noting the company was one of seven to sign on to the Biden-Harris administration’s voluntary commitment to ensure that AI is safe and secure.
TikTok declined to comment.
Know more about Scale AI or other defense contractors? Contact reporters David Jeans at [email protected] or 347-559-5443 on Signal, and Kenrick Cai at [email protected] or 415-570-9972 on Signal.
Scale, which uses human labor to label the data on which AI is trained and has expanded to other data analytics services, began working with the government in 2020. Wang’s original vision for the company’s new defense arm, he previously told Forbes, was in part inspired by a 2018 trip to China, during which he toured the offices of TikTok’s parent ByteDance and other tech firms. He left impressed by the AI they were developing, but worried it could pose a threat to American leadership: “You could tell it was for no good,” he said, “and it was really scary.”
The startup is now among a handful of tech companies like Palantir and Anduril most vocally courting defense contracts. Between 2020 and the end of the third quarter of 2023, Scale spent $1.95 million lobbying the federal government, according to lobbying disclosures, and has generated $90 million in public government contracts over the same time period, procurement records show (this figure doesn’t include potential non-public contracts). By 2023, the number of people working on Scale’s public sector business had grown to more than 100 employees, the company said. Brennan told Forbes that Scale currently has 20 active government contracts.
As the government business expanded, leaders on the federal team had concerns that went beyond the TikTok deal.
Scale’s defense arm still pales in comparison to its commercial business, which pushed the company’s annualized revenue run rate in late 2023 to $750 million, according to two people familiar with the matter — up from about $250 million in early 2022. That growth was spurred by skyrocketing demand from AI companies for reinforcement learning with human feedback (RLHF), a data labeling technique for large language models. To date, the company has raised $600 million from blue chip investors like Accel and Index Ventures. (Accel and Index, which sit on Scale’s board, declined to comment.)
But as the government business expanded, leaders on the federal team had concerns that went beyond the TikTok deal. On two occasions, military personnel complained to Scale executives about what they viewed as overstatements about the company’s work with the government and the extent of its capabilities, according to three sources. Last year, the company announced the launch of its national security focused product, a platform called Donovan that adapts large language models (LLMs) like OpenAI’s GPT-3.5 for use with classified information. In a press release, Scale claimed Donovan would be deployed for “critical use cases” by the XVIII Airborne Corps of the Army and would “help military staff understand and organize the ever-growing volume of data with no training or coding experience – in minutes.” The company said “the air tasking order cycle currently takes three days, and Donovan can shorten the timeframe of that cycle to hours.”
After the release was published, Colonel Joe O’Callaghan told Scale executives the company had overstated the nature of the partnership, multiple sources in position to know told Forbes. They said Scale did not have access to the XVIII Airborne Division’s air tasking orders at the time and that Donovan had not been greenlit for “critical use cases.” Brennan said Scale stands by the press release and that he could not comment on contractual agreements.
Months later, during a pitch meeting with another Army unit, U.S. Central Command, the unit’s leader General Michael Kurilla told Wang that Donovan was not ready for production, after seeing a live demo, according to two people familiar with the matter. Brennan said Kurilla “did not say that to us.” Wang said Donovan is “currently utilized by more than 80 government organizations.” Two sources told Forbes that as of late 2023, trials and pilots comprised the bulk of Donovan’s usage, but that Scale was struggling to move them into full-fledged contracts.
The company did not respond to questions about whether this count includes organizations that have signed up for the free trial that Scale promotes on its website.
The Defense Department did not respond to questions about the XVIII Airborne Corps or U.S. Central Command.
Wang, who was on the cover of Forbes last year and was an honoree of the 30 Under 30 list for Enterprise Tech in 2018, expected government contracts to be easy money, three former employees said. In 2020, Scale signed its first contract with the Department of Defense. Negotiations were straightforward and promised a potential windfall around $100 million over four years, according to government procurement records. It has paid out close to $80 million so far, per the records.
Scale’s ability to secure the contract was made easier because the Department of Defense was in the market for a new data labeling vendor on Project Maven, the same AI initiative which Google employees had protested two years prior because its tech was being used to analyze drone strike footage. The Defense Department had asked Scale to apply for the contract, according to multiple people familiar with the matter.
The government “teed that contract up for Scale and held their hand through the process to make sure Scale was in a position to be competitive,” said a person with knowledge of the matter. “That colored Alex’s mind on how working with the government really is.”
Brennan declined to comment on Project Maven, citing publicity clauses which precluded him from discussing certain government contracts. The Defense Department adheres to regulations on acquisition and contracting, spokesperson Sue Gough said; she declined to comment on the Project Maven negotiations.
While Scale did not publicly talk about the Project Maven deal, its first big defense announcement underscored the complexities of winning military contracts, when in January 2022 it touted a $249 million award to develop test and evaluation tools and provide its “end-to-end AI solution” to the Defense Department. But the announcement was misleading: it didn’t mention that 70 other companies were eligible for the same money. To date, Scale has not received any payouts for that contract, according to government procurement records and confirmation from two company insiders. Brennan said the company currently has several ongoing contracts under “several different contract vehicles.”
Scale’s defense business still hinges on Project Maven, its first contract, which comprised the majority of its federal revenue as of 2023, according to three sources. That deal is due to expire this spring, when the company will have to compete for it again. Brennan told Forbes that the federal business revenue has grown 160% since 2021 and declined to comment on specifics of Scale’s contracts, citing confidentiality agreements.
Serving America’s national security interests remains a priority for Wang. During an AI forum hosted by New York Senator Chuck Schumer in December, he again talked about his trip to China: “After returning,” he said, “I knew that I had to make it part of Scale’s mission to do everything I could to support the U.S.”
Alexandra S. Levine contributed reporting.
