Cristóbal Valenzuela is no stranger to weird, scary creatures. As cofounder and CEO of Runway, a five-year-old New York City startup that develops AI tools for video, his company’s product has brought to life a parade of surreal on-screen characters, from shape-shifting dolls that melt into walls to dancing giants with contorted faces.

When I talk to Valenzuela on a winter afternoon, the conversation is about why some scary creatures—even the most menacing giants—aren’t really scary if you know how to destroy them.

“Sometimes a sling and a stone is all you need,” Valenzuela tells me.

We’re talking about slings and stones because of the imposing shadow stretching over Valenzuela’s company. Days before our chat, OpenAI, the $86 billion, Microsoft-backed juggernaut of generative AI, unveiled its latest creation: a text-to-video tool called Sora that essentially does what Runway does; in some cases, maybe better.

As with Runway’s product, Sora lets users type a description of a scene into their computer—a woman walking along a puddle-filled street, for instance, or a fire-breathing dragon in flight—and within moments watch a video that looks as if it were produced in Hollywood.

Sora’s buzzy unveiling caused instant speculation about the tidal wave of change headed for the entertainment industry. As if on cue, filmmaker Tyler Perry said he was putting on hold a planned $800 million expansion of his Atlanta production studio because of Sora. By late March, OpenAI execs were reportedly setting up meetings with studio execs and talent agencies to discuss how to use the tool.

“Sometimes a sling and a stone is all you need.”
Cristóbal Valenzuela, Runway cofounder and CEO

For tech firms, bringing the magic of AI to video is a massive business opportunity, spanning film, television, video games, advertising, and the burgeoning online creator industry, to name just the most obvious candidates. Since its founding in 2018, Runway has made inroads into many of these markets, building relationships with TV and film studios whose staff use its AI-powered editing tools, contributing to music videos by artists like Kanye West, and dazzling creatives with its text-to-video app.

Now, almost overnight, a market Runway was quietly shaping on its own terms has morphed into a battleground. Runway is hardly a minnow—it raised $141 million in funding from backers including Google and Nvidia last year, and boasts a $1.5 billion valuation—but it’s now facing a direct challenge from a rival several times its size and helmed by the AI industry’s most influential entrepreneur and fundraiser, OpenAI cofounder Sam Altman.

“We have battled a few other Goliaths before,” Valenzuela says. And yet, Valenzuela is the first to recognize that the narrative is bigger than a matchup between two well-funded companies from opposite coasts. As AI barges its way into one industry after another, the expansion into video represents one of the technology’s most consequential and high-stakes tests yet.

The anti–Silicon Valley startup

With its headquarters in New York City, Runway built its business and culture thousands of miles from the Silicon Valley scene (although it now has a San Francisco outpost in a beautiful Beaux-Arts building). Its three cofounders—Valenzuela, Anastasis Germanidis, and Alejandro Matamala Ortiz—don’t fit the typical techie mold. The trio of immigrants, with backgrounds in film, computer science, design, and econometrics, met at New York University’s Interactive Telecommunications Program and are more comfortable talking about the history of cinema than cap tables and pitch decks.

Valenzuela, who grew up in Chile, cites anti-poetry—a literary rebellion against traditional forms—to emphasize the company’s ethos of flouting industry conventions. Runway’s goal is to empower a broader spectrum of creatives who previously lacked the opportunity to bring their cinematic visions to life by providing tools for the “99% of the world” Valenzuela says has not been heard from.

An AI film festival organized by Runway, now in its second year, receives thousands of submissions from around the world and gives away tens of thousands of dollars in prizes for the short films that best showcase AI’s cinematic potential (shape-shifting creatures figure prominently). Runway notched accolades of its own with 2022’s Oscar-winning Everything Everywhere All at Once. Evan Halleck, a VFX artist for the movie, told Variety that Runway’s AI tool was a huge time-saver for the small team creating the memorable scene of two moving rocks having a heart-to-heart. Not only did the AI erase the pulleys and other film gear from the green screen more accurately than he could have, but Halleck said he was able to get it done in minutes as opposed to half a day.

Lately, the company’s tech has become a go-to for music videos: The band Thirty Seconds to Mars released a trailer created entirely with generated content from Runway, and Madonna is using Runway for the visuals on her world tour.

Runway’s product has four tiers, ranging from free to $76 per month, as well as versions for business customers, with each tier offering additional capabilities and features. As a privately held company, Runway does not disclose its financial results, including whether it’s profitable. But the company told Fortune that its annual recurring revenue increased 24-fold in 2023, and it expects the rate to increase this year.

While Runway has so far differentiated itself from other AI video tools such as Pika Labs, and prototypes from the likes of Meta and Google, the company needs more success stories like Everything Everywhere All at Once as competition heats up.

A renewed sense of urgency

In a market as fast-moving as generative AI, history and loyalty may not count for as much as whatever shiny new features rivals roll out. OpenAI has shown it can move at a formidable pace: Its GPT large language model for generating text has progressed from GPT-2 to GPT-4 (the number of parameters used by the model is rumored to have increased 1,000-fold) in four years. DALL-E, OpenAI’s image generator, is on its third version.

For now OpenAI’s video debut, impressive as it may be, is just a demo; the company hasn’t specified a date for making Sora available to the general public.

But Valenzuela acknowledges that OpenAI has injected a sense of urgency into Runway’s operations. “Now is the time to go faster and to actually start doing more of what we always thought and will continue to do,” he says.

With roughly 85 employees, Runway is severely outweighed by OpenAI, which had more than 700 employees at the end of last year (although this workforce is deployed across many projects other than video, such as its flagship GPT product). OpenAI’s alliance with Microsoft, which includes a $13 billion investment from the software giant, is another big advantage. And of course, there’s Altman, the former head of startup incubator Y Combinator, whose stature within Silicon Valley’s elite money and power structure is nearly unmatched. After he was briefly ousted from OpenAI in November, the result of a “breakdown in trust” with the board, Altman is back in command and more powerful than ever as he plows ahead on his quest to create an artificial superintelligence that he predicts will unleash an unprecedented boom in productivity and wealth.

It’s a different vision than that of Valenzuela, the artist turned CEO, who told tech site The Information last year that “not everyone is trying to build God.”

The rocky road to Hollywood 2.0

Despite Runway’s lofty goal to democratize filmmaking, AI is a fraught topic in Hollywood. And one of the biggest wild cards in the newly competitive race to win the video market is the blowback it could create.

Last year’s Hollywood strikes underscored fears of AI decimating industry jobs. The studios pledged not to substitute AI for writers and actors, but industry experts believe the pace of AI advancements will make the technology a major sticking point when the latest union contracts expire in 2026.

Copyright is another land mine. Runway, along with Stability AI and Midjourney, were hit with a class-action lawsuit in February by artists who claimed the AI startups’ models were trained on their work without permission. (Runway’s defense is that these artists can’t actually show any examples of Runway making exact replicas of their work.) And video AI’s potential to supercharge the spread of ultrarealistic-looking misinformation is already ringing alarm bells in world capitals.

Some AI advocates liken the broader industry upheaval caused by AI-generated art to the displacement experienced by painters and pigment makers with the advent of the camera, a phenomenon that led to Impressionism and other now-celebrated styles of modern art. Valenzuela cites the orchestras that once provided live music for silent films: As they disappeared, new jobs like sound engineer and special-effects artist emerged. “The point is to continue evolving,” he says. “You’re probably not going to need any of the things that you might have used or required over the last 50 years to make great movies.”

Valenzuela calls this incipient golden era of moviemaking Hollywood 2.0. The slip into techie vernacular is a telling indication of what’s ahead, both for Runway and for Valenzuela, whose customary black T-shirt and matching black jeans ensemble doesn’t look so different from the famously minimalist fashion statements of Steve Jobs, Mark Zuckerberg, and more recently Sam Altman.

If Runway’s effort to conquer Hollywood with AI is successful, the New York startup could become an iconic tech company in its own right. But first, Valenzuela and his cofounders must fight Silicon Valley’s reigning AI Goliath.

The battle for Hollywood 2.0

Text-to-video generative AI tools could bring massive changes to the entertainment industry.

Runway

HQ: NYC
Founded: 2018
CEO: Cristóbal Valenzuela
Employees: 85
Products: Gen-2, AI Magic Tools
Key investors: Google, Nvidia, Salesforce, Felicis
Funding: $238 million
Valuation: $1.5 billion

OpenAI

HQ: San Francisco
Founded: 2015
CEO: Sam Altman
Employees: 700-plus
Products: ChatGPT, DALL-E, Sora
Key investors: Microsoft, Khosla Ventures, Thrive Capital
Funding: $13 billion-plus
Valuation: $86 billion

This article appears in the April/May 2024 issue of Fortune with the headline, “Memo to Silicon Valley: Bring it on.”

As OpenAI targets Hollywood with Sora, Runway’s CEO is waiting for the $86 billion Goliath with a ‘sling and a stone’