Updated January 20, 2023 at 6:47 PM ET
A Belarussian millionaire living in Cyprus. A dinner with the CEO of Snap. A six-figure patent troll case.
They are all part of the history of Prisma Labs, a largely obscure artificial intelligence startup that spent years under the radar until November, when the company introduced "Magic Avatars."
The feature in Prisma's Lensa app has allowed millions to turn mundane selfies into dazzling AI-generated animated portraits of fairy princesses and astronauts. And it has brought in tens of millions of dollars.
Now, Prisma is trying to capitalize on the magic.
Company executives are scrambling to come up with ways to extend the buzz. That has included talks with major companies like Disney and Marvel, NPR has learned.
At the same time, Prisma is grappling with its past. It's not the first time the little-known startup has taken the internet by storm, yet a history of stumbles and a long series of failed acquisition discussions haunts the company as it attempts to remain a formidable player in the app world.
NPR talked to half a dozen people with close ties to the company, a 90-person operation run out of Cyprus, to bring the company's shadowy history into clearer view.
Commanding outsize power at Prisma now is a Belarussian tech entrepreneur behind a suite of health and wellness apps including Flo, a period-tracking service, but he has kept his ambitions for the company tightly guarded.
Back in 2016, the last time Prisma released an AI-powered photo app that captured a worldwide audience, company executives were flying to Beijing to Silicon Valley for meetings with tech titans that showed keen interest in the company's potential.
No acquisition deals were ever inked.
Company insiders cite a patent troll lawsuit, a company culture that did not mesh with more established tech firms and, at least in the U.S., anti-Russian skepticism as factors in the rush of interest eventually dissipating.
Prisma is hoping this time is different.
The release of Magic Avatars rocketed to the top of App Store charts after being downloaded more than 20 million times. For $3.99, users could create 50 photorealistic and ethereal avatars of themselves as if drawn by professional digital artists — usually with a flattering twist.
The concept was simple: the app scrapes billions of publicly-available images from the web and processes them through an open-source algorithm known as Stable Diffusion.
So was the appeal. A gusher of cash poured in, even as Lensa confronted criticism about how female bodies and dark skin were portrayed, as well as arguments about whether the technology steals artists' work. The promise and potential pitfalls of AI wizardry was being taken in by thousands of people each day, as everyone gazed in wonder at AI images wearing their faces.
"They hit on an interesting combination of two things: an approachable interface and how many people online like to explore alternative versions of themselves," said Max Kreminski, a researcher at the University of California, Santa Cruz, who studies creative applications of AI.
The economics of the app delivered a fat return.
It only costs the company about 50 cents to process one pack of Magic Avatars, which people pay at least $3.99 for, "so there's a great margin," according to one insider.
Prisma Labs made more than $70 million from the app in November alone, a company official estimated.
The single-biggest expense is the immense computing power required to process the avatars, according to an insider who estimated that half of the revenue from Magic Avatars was paying, essentially, for electricity.
The company would not comment on specific figures, but said it relies on Amazon Web Services' servers to power the feature.
Company executives say users' selfies are deleted from its servers after the avatars are made, but that the selfies are used as data to train the app's algorithm.
From Russian Big Tech to viral AI photo app
Five men from Russian Big Tech joined forces in June 2016 to found Prisma: Alexey Moiseenkov, Oleg Poyaganov, Ilya Frolov, Andrey Usoltsev and Aram Hardy.
As a student at the Moscow Institute of Physics and Technology, Frolov had taken a class from Moiseenkov, a former product manager at Mail.ru, which owns a social media site similar to Facebook. Moiseenkov was inspired by his student's idea to try to make an AI-powered photo app and so they teamed up with Poyaganov and Usoltsev, who both previously worked at Yandex, the most popular search engine in Russia.
Hardy, another former Mail.ru employee, was brought on to handle marketing.
With a shoestring team of just nine people, they created a hit app that offered easy-to-use editing tools and filters so people could make their photos resemble famous works of art. Tech publication the Verge called it the best app of the year in 2016, declaring that "Prisma will make you fall in love with photo filters all over again."
Even though the app could apply filters to photos instantaneously, a buffering time was added to make users feel like the process was more "magical," according to one former top employee of Prisma, who said "we thought users wanted to feel like there was magic happening."
A spokeswoman for Prisma disputes this, saying the processing time reflected the AI system operating in real time.
In its latest app, Lensa, processing Magic Avatars can take hours to finish. People with knowledge of the app say that is not the result of trickery, but a window into the computing power necessary to produce the images. The process "requires an astonishing amount of calculation," the Prisma spokeswoman said.
At the height of its 2016 success, the company encountered some trouble. It was hit with a costly lawsuit: An app developed by a North Carolina man called "Prizmia for GoPro" changed its name to "Prizmia" and sued for trademark infringement.
While a federal judge in Delaware eventually ruled in favor of Prisma more than a year after the suit was filed, it cost the company $600,000 in legal fees and sapped a significant amount of the scrappy company's resources, according to a company source who was involved in the case, who described the Prizmia owner as a patent troll.
The kicker? The plaintiff had offered Prisma to settle for $400,000.
"Which we thought was ridiculous at the time," the source said. "But it ended up being more affordable than our legal defense."
As the lawsuit unfolded, tech suiters still came knocking.
Many stalled acquisition talks
According to a person involved in the negotiations, Chinese tech giants Tencent and Bytedance held acquisition talks with Prisma's founders. Facebook and Google also were in discussions. No deal ever materialized. Apple, too, engaged with Prisma around this time, and the talks met the same fate.
"There were some troubles. Visa issues and so on," Hardy, a Prisma co-founder, told NPR. "So the whole discussions just faded."
The CEO of Snap, which makes Snapchat, Evan Spiegel, met with Moiseenkov and expressed interest just before Snap went public in 2017, two sources told NPR. But before an offer could be extended, talks broke down over visa issues related to moving Prisma's small Moscow team to the U.S.
It is not clear why Prisma was never able to hammer out an agreement with any of the interested companies, but one early investor said the excitement about the app was extraordinary, making the lack of solid offers all the more disappointing.
"This level of interest was extremely unusual," said the company source, who believes that headlines at the time about Russian interference in the 2016 election led to hesitation about acquiring a Moscow startup, at least among the American tech companies.
Prisma attempted to pivot to becoming a business-to-business company in the intervening years, but the effort never took off.
Moiseenkov has since left the company, handing the CEO reins to Usoltsev.
Last year, in March, Usoltsev laid off 30% of the staff and told employees they would have to relocate to Cyprus, or outside of Russia.
"We were told potential investors didn't want to work with Russians," said one former Prisma employee, noting that the announcement was made weeks after Russia invaded Ukraine.
"They said an acquisition would be harder if we stayed in the country," the ex-employee said.
The company confirmed the layoffs and note to staff to NPR, but said the moves were driven by economic sanctions leveled against Russia in the wake of its war in Ukraine.
Belarussian tech investor biggest Prisma investor
Belarussian investor and former Mail.ru executive Yuri Gurski now owns the majority of the company's shares. Gurski operates the startup Palta, the maker of a suite of health and wellness apps including Flo, Simple Fasting, and Zing Fitness.
Back in 2016, Mail.ru also invested in Prisma Labs. Since 2021, its chief executive, Vladimir Kiriyenko, has been deemed a Russian oligarch and was sanctioned by U.S. and European authorities following Russia's invasion of Ukraine. But Mail.ru no longer has any ownership of Prisma.
Palta purchased Mail.ru's shares as well as former CEO Moiseenkov's stake in the company, giving it more than 50% control. Neither Gurski, nor any other representative from Palta, responded to requests for comment.
Prisma Labs now has about 90 employees, most of whom are based in Cyprus, where Gurski also lives.
The company was incorporated in Sunnyvale, Calif., but a person involved in that process said the Sunnyvale location is not much more than a P.O. Box.
Lensa eyeing brand partnerships
Prisma insiders say many at the company are rushing to keep the momentum of Magic Avatars alive to avoid repeating history.
"It's trendy now, but will people use it four months from now? If it's anything like what happened in 2016, everyone will forget about them by then," said an investor who has backed the company for years.
Prisma is eyeing potential collaborations with major brands that might want to jump on the AI moment.
According to multiple people with knowledge of the talks, it has held discussions with Disney and Marvel about teaming up to allow users to turn their selfies into characters from the two franchises, though one source indicated that a deal does not appear imminent.
Kreminski, the AI researcher with the University of California, Santa Cruz, said dozens of startups are building creative tools on top of the Stable Diffusion technology that Lensa is using — not to mention other impressive AI image generators growing in popularity, like DALL-E2 and Midjourney — so standing out is going to take much more than a viral avatar feature.
"It's a super frothy space. There are so many people trying to capitalize on this technology right now," he said. "And I don't know if the existence of past success means there will be future success."
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